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MSFT Lesson: The Herd Following Mentality of Value Investors
Seeing the vibrant volunteering community in free software open source community, I had serious worries about Microsoft (MSFT) for months. Yet I did not act on my insight because a number of superinvestors I respect were tooting Microsoft. So I had doubts about my first-hand experience and my own judgment.
Today, my first hand knowledge about Microsoft and my worst nightmare is confirmed:
http://finance.yahoo.com/news/Microsoft-to-slash-5000-jobs-apf-14125803....
Reviewing all the major mistakes in my investment career. I recently discovered that a lot of my huge losses stem from blindly following a well respected investment expert despite mounting evidence on the contrary. Blindly following the experts is a big mistake, a sickness of an independent mind.
From today on, I will question the analysis of all investment experts and rely on my own first-hand practical experience and hands-on research. That includes questioning the masters from whom we have learned so much.
The idea of coattailing superinvestors has been hot in the value investing community for a couple of years already. A number rising stars capitalized on the value investing phenomenon. It turned out that even we, the self-proclaimed contrarians, are not immune to the herd mentality of crowds.
Value investors suffered huge losses by blindly following other smart investors who have been tooting their stocks and performances.
Five hundred years ago, the Buddha said: "Be a Light onto yourself!" Your teachers can help you and prepare you. But you have to the one to light up your inner candle yourself. The inner investigation to experience being a Light onto oneself is the key of deep meditative thinking. True meditation is mentally free from all opinions, from all outside influences, and from all authorities.
There is a concept called the "Great Doubt" in Zen wisdom that calls for the questioning of any idea from experts and authorities. That means that as value investors, we should even questions the analysis of even the greatest of all.
Search and investigate through first-hand experience, and you will find the Light with your own eyes.
From today on, I will question all the value investing gods that we know.
The fad of value investing got a lot of people hurt. Please take a dispassionate look at your own portfolio. How much losses stem from following superinvestors and pushing aside your own first-hand insights?
Please share with me the result of your review.
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If you are following someone you are not value investing.
If you are judging your investments by short term metrics and today's quoted price you are not value investing.
p
I think Charlie Munger said that we have to start somewhere by following the smart people ahead of us, then we march forth on our own.
You're right, p, I agree with your value investing principles to a certain extent.
On the other hand, if you put up money with a CEO or a money manager, you are in a sense "following" someone. You also have to use smart people research because you can't do everything on your own. When we begin, we study and follow the right heros. So following the right person in the right way is not a sin by itself.
And if you believe in value investing so much, we know for sure you are following a group of smart people, even if you say you are not following anyone.
I understand your point that value investors ignore short term volatility. Here I am talking about how expert opinion made me ignore the drop in Microsoft's fundamentals. Also, if my stock drops 50% and I still think I did not make a mistake. I might be letting a "Value Investors' Arrogance" creep in.
Ignoring the price has some wisdom in it. But many value investors don't face reality. They always believe they are right about the value, claiming the Mr. Market is wrong about the price.
There are the yin-yang of everything, the both sides of every issue. Certain long held "obvious" notions of value investing may need to be re-examined.
p, you are a wise guy. But investing is hard in many spots. The only thing I know is that I don't know.
I'm neither wise nor particularly smart.
I am one of those people who immediately understood the concept of buying a dollars for 40c.
If you are buying dollars for 40c and there is a market decline to 25c, you should buy more or a bigger position in the security, unless the future prospects have changed dramatically.
I feel you are over-thinking a simple process
p
Price has NOTHING to do with value. period.
Value is the sum of the cash flows that can be extracted from a business over the expected life of the investment.
Price is the dollar amount you can obtain those cash flows for TODAY. The PRICE will be different tomorrow.
When the price allows you to buy those cash flows at a strong discount to other available choices and you pounce you have made a value investment.
The outcome of your choice should be judged by looking at the long term cash flows, not today's crisis induced price change or earnings dip/bump due to a current slow economy.
Value investing works. Speculating and telling yourself you are value investing, or momentum investing and telling yourself you are value investing of course do not.
p
i agree with both of you. i share p's conviction about value investing. i share brian's point that we need to consider the flip side. munger says: revert, always revert. buffett said we need to collect and sort out conflicting information. so we argue from both sides. develop a conviction on one side, and then we can't be dogmatic, we have to continue to listen to the flip side and see if we were wrong. anyway, yin yang yin yang, thanks to my wise ancestors! debates and thought challenges make all of us wiser.
Yes, p, value investing works. But I would not say that price has nothing to do with value. Price can become a self-fulfilling prophecy of value, as George Soros smartly pointed out. If your stock price is three times your value, and if you can issue enough stocks at the high, you bring your intrinsic value closer to the inflated price. So price and value could influence each other. Ben Graham pointed out the value tends to pull the price towards it.
Are value investors too arrogant? Maybe. They dismiss growth investing as momentum chasing. The notion is that if you look into momentum investing, you are a bad person or a stupid person.
From timeless ancient wisdom we know that too much of a good thing can become bad. Too much of a bad thing can turn good. Our extensive case study discovered that Warren Buffett practiced one sort of growth or momentum investing in a value bent, joining them at the hips.
Value plus momentum is not automatically a dirty word, based on our unbiased study.
We are designing simple-to-follow systems to prevent the value investor's arrogance and mental dead corner. If we see the value of Microsoft heads down based on earnings and cash flow, we feel we made a mistake.
In your terminology, we feel we overestimated the present value of future cash flows.
Would a price drop alert you to a possible mistake? Would a temporary drop in fundamental value alert you to a possible long term impairment?
We try not to say "Period" to any argument. But you could be right if we allow too much second guessing.
If you say "Period", when would you turn around and admit a mistake? What signs do you watch? Do you just say, I am right, period, to hell with Mr. Market, to hell with earnings reports?
Also, on the flip side, when the experts were wrong, that's often the best investment opportunity you can find. We should specialize on finding out where the experts could be wrong.