Investing is an activity against human nature, especially when it is often necessary to be out of the ordinary in order to achieve the ultimate victory. We begin this article with a famous quote from Mark Twain: “Whenever you find yourself on the side of the majority, it is time to reform, pause or reflect.” This is even more true in the stock market.
The collective IQ of the masses will drop sharply
Gustave Le Bon pointed out in his masterpiece “The Crowd” a hundred years ago, “As soon as a person enters a group, his IQ is severely reduced. In order to gain recognition, the individual is willing to abandon it. Right or wrong, use IQ in exchange for the sense of belonging that makes people feel safe.” When a group of people is together, the collective IQ of the crowd will drop significantly when compared to when they are alone.
“The public does not have the ability to discern, and therefore cannot judge the authenticity of things. Many viewpoints that cannot withstand scrutiny can easily be universally agreed!” “We always have the illusion that our feelings originate from our own hearts. In fact, it’s not necessarily. In many cases, our emotions come from the group’s evaluation of.”
When a group of people are together, the collective IQ of the masses will drop drastically compared to one person! Everyone has heard a saying that watching TV makes people dumb. In the same way, watching the talks of these well-known experts from time to time can make investors dumb and lazy. Because once a person develops a bad habit that is difficult to quit, he will start to stop thinking (this is why watching TV makes people stupid).
It’s human nature
“Crowds can only do two things: icing on the cake or kick someone when he is down .” “The masses have never craved the truth. They turn a blind eye to unpalatable evidence.” “Isolated individuals have the ability to control their own reaction behavior, while the group does not. Blind obedience will overwhelm the individual’s rationality. Once an individual puts himself into the group, its original independent rationality will be overwhelmed by the group’s ignorant madness.” Therefore, group meetings in the company may not be able to achieve most of the results. The result of what people expect to gather the wisdom of everyone is often the opposite of what everyone knows.
Consequence if same as the crowd
Like the opinions of the masses, they will be assimilated for a long time without knowing it, and the result will be to abandon themselves and merge into their peers. This is the reason why I wrote another blog post “Why the successful skills needed for stock investment is opposite of successful workplace skills“. John Templeton reminds investors that “If you buy the same securities everyone else is buying, you will have the same results as everyone else.” Templeton’s words could not be better understood, this is basic logic and simple mathematical problems, the actual investment report will be worse than the market, because the necessary commissions and handling fees must be deducted.
Heed the words of the great pioneer of stock analysis Benjamin Graham:
“Buy when most people…including experts…are pessimistic, and sell when
they are actively optimistic.”
The crowd are always wrong
Bernard Baruch, advisor to presidents, was even more succinct: “Never follow the crowd.” So simple in concept. So difficult in execution. He recalled the situation on the eve of the Great Crisis and said, “With the soaring stock price, people have long forgotten.”
James Solovich explained in the book “The Wisdom of the Crowd” that “Independence is very important for rational decision-making. There are two reasons: the first is that the various mistakes made are not related, and individual judgments are wrong, as long as the mistakes are not pointing in the same direction systematically will not ruin the collective judgment. Second, independent individuals are more likely to have new information, rather than stale information that everyone is already familiar with.”
What is the reason for this?
Buffett has repeatedly stated that “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.” In the investment world, Things that make you comfortable are rarely profitable.
As an example everyone knows, Apple’s Cook has been criticized by the media every day since he took over as CEO. As long as there is no creativity, no background in research and development, and no charisma, Apple is going downhill from now on; Cook responded by saying, “I will be criticized even for breathing.” Even Wall Street has joined the ranks of criticism, encouraging investors to dump Apple stocks.
I myself have heard countless negative comments about Cook, but I scoffed at my ideas at all these words; focus on the facts Cook delivered, only look at the actual results, and let the numbers speak. This year is exactly the tenth anniversary of Cook taking over as CEO. With his actual achievements, he dispelled everyone’s doubts about him, which proved that all those who were short-sellers and stocks dumped people regretted it:
- Over the past ten years, Apple has been the world’s number one listed company in market capitalization, and today it has reached US$ 2.5 trillion.
- In 2011, the company’s market value reached 343 billion U.S. dollars, and now it has reached 2.5 trillion U.S. dollars.
- In the third quarter of fiscal year 2011 (as of the end of June), Apple’s revenue was US$ 28.57 billion. In the same period of fiscal year 2021, Apple’s revenue had reached US$ 81.4 billion. The fourth quarter of 2020 also leads all companies, breaking through the historical quarter revenue of 100 billion U.S. dollars, reaching the milestone of 111.43 billion U.S. dollars.
- In 2011, if invested 1,000 US dollars to buy Apple stock. As of August 23, 2021, its value will exceed 16,800 US dollars. The stocks were split twice in ten years, and the original one share became today’s 28 shares. If the allotted dividends are continuously invested, the annualized rate of return can reach more than 32%. In contrast, the annualized rate of return of the S&P 500 Index during the same period is only slightly higher than 16%.
- Launched Apple Watch and AirPods, which were very popular.
- Increase the high-margin non-hardware service business unit, including iCloud, Apple Music, and AppStore, to account for 20% of revenue. Revenues from 2.95 billion U.S. dollars in ten years reach 53.77 billion U.S. dollars in fiscal year 2020.
- iPhone revenue accounted for below 50%.
- The iPhone market share has risen from 14-15% to 26% worldwide.
- The iPhone has shipped 2 billion units so far, and more than 1 billion iPhones are in use; more than 1.65 billion Apple devices are activated.
But why people follow crowd?
Now that you know the consequences of conforming to the crowd, why do most people in this world still choose to be more emotional than rational? For most people, investment has always been more emotional than rational; because when you figure it out one day, that is, when rational triumphs over emotional, congratulations, you are already on the road to invest success.
Buffett said: “Investment must be rational. If you can’t understand it, it’s not easy to do.” and from his view: “Investment is a rational job. If you can’t understand this, it’s best not to mix things up.” This is why he said “I am very rational. Many people have higher IQs than me, and many people work longer hours and work harder than me, but I do things more rationally. You must be able to control yourself and don’t let emotions dictate your sanity.”
Keynes said: “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” This is one of the major reasons why institutional investors are doomed to fail in investment. Because most people, in order to gain a foothold in this world, will give priority to being affirmed by the people around them. As far as institutional investors are concerned, the level of seeking to keep their jobs and earning rewards for customers is very low in their hearts.
The road to successful investment is lonely
The problem is that people are group animals and need to be affirmed by their peers; this is how our society works. But also because of this, it has caused a natural and fatal flaw in human investment. Successful investors are very lonely on the investment road, it will be very boring, and few people can stick to the end; this is why there are few successful investors. Almost all investment masters who have been recognized as very successful in history admit that investment is a lonely road, and interested readers can refer to their relevant biographies.
Finally, I quote Howard Marks’s words ended “Extraordinary performance comes only from correct non-consensus (with the masses) forecasts.”
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