This post is not about a stock valuation. This post is about what it takes to be a great value investor. Lots of people believe it requires a genius brain. That helps, but I still say if you're in the top 3% in the world in terms of brains, please just make the world a better place. You can make your fortune that way, and help the world. However, there is one other reason. Humans are hardwired to look for patterns even if none exist. Let me prove it to you. There is no pattern in the set of numbers I am going to give. 1,2,3,4. What is the next number? Did you guess 5? If you did, you're wrong! It's pi. Didn't guess that did you? You may argue that the set of numbers was increasing by 1, but remember what I said. There is no pattern. Even if one appears, it is by random chance. This is the problem faced with the top 3% of geniuses. You still have that bias where you think there's a pattern, except you're so smart you refuse to think you cannot find it, it's just nobody else has. So you keep looking, but in reality there is no pattern. You use your technical analysis to find a price, and then are wrong. You say it didn't follow the pattern, but again the reality is there is no pattern. This is why I say value investing should not be done by people that are in the top 3% or bottom 10% in terms of brainpower.
You may still succeed if you are in the top 3% but for that you need to learn how to control your emotions. This is a lot easier said than done. In fact when lots of people are telling you the opposite of what is true, you may want to consider changing your ideas because you think its wrong, but it isn't. Let me give you an example. When RIMM was at $120, I told a friend of mine it is overvalued. He laughed at me saying that it is worth whatever people are willing to pay for it. Most people at that time saw blackberries as the best device and said it's worth whatever price it's selling at. Remember, just because somebody is willing to pay a lot of money for a stock doesn't mean it's worth that much, however, you can sell it and make a nice tidy profit. In the end I was proven right, stunningly so. The stock crashed to $18 at which point I thought it was undervalued. People laughed at me. The same people who laughed at me when I said $120 was too much. Logic eludes them. After all it's still the exact same company and they think it's fairly priced at $120 and overvalued at $18. Now to be fair it fell further and now is around $13-$14. At this point people are starting to stay it may be undervalued after it doubled in the last month. I'm not saying they're right or wrong, I just find it interesting the way they're valuing it. When it had gone up a lot people said it was worth buying, after it went down a lot people said it should be sold, and now that it has doubled in a month people say it should be bought. This reminds me of something Peter Lynch wrote in One up on Wall Street. He said we always prepare for what has already happened. So if prices have gone up at a ridiculous rate, we think it will continue going up at that rate, even though we should know that is unlikely. This is because after prices go up a lot it has probably (though not certainly) hit it's fair value or more and will probably go down.
So what do we take away from this? First, we must ignore the market and make our own decisions. That is important. We have to analyze the companies ourselves and determine a fair price. Don't just take my analysis, if you disagree, all the better because you probably understand it better than I do. The RIMM thing shows the popular sentiment is not always right. So it is better to ignore it altogether. What you need to succeed in the market is to ignore everyone else and do it yourself. I know it helps if someone better than you analyzes it, but unless you understand his analysis don't follow him because he can change his mind, or even be wrong. Even Warren Buffett's been wrong. So the key is to analyze it yourself and ignore people unless you understand what they're saying and they're right according to you. Also notice that people buy when stock prices go up and sell when stock prices are going down. This is because they are emotional. You must not get emotional about stocks. That is key. As always if you disagree the comments section is below.
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