At a recent investment competition that I attended, one of the judges asked the question to all teams, in a somewhat long-winded way, “How is your opinion different than the consensus?” ?Perhaps because I have heard it for too many years, I got a little tired of it.
So what is the consensus? ?There is no “consensus” document that is publicly available.
- The consensus could be any collection of factors that justifies the current market price.
- The consensus could be generally agreed upon ideas of a large majority of “sell side” analysts.
- The consensus could be a few critical factors that are widely agreed on.
A correct insight that is different from that of the majority is valuable. ?But the majority is often right, at least in the short run. ?I often found as a buy side analyst that some sub-industry sectors were rationally priced and there were no plays to be made.
Therefore I would say don’t force yourself to be different from the consensus. ?If you have good reasons to be different from the consensus, pursue those views.
Sometimes the best answer is, “I don’t know,” or “This seems fairly priced to me.”
You don’t always have to make a decision. ?Even Buffett has a “Too Hard” pile for documents. ?As an aside, he tossed Assurant into the “too hard” pile, while I immediately embraced the IPO. ?And yes, I did have a view that was different than the seeming consensus.
Some say, “Not to Decide is to Decide.” ?Well, yeah, but as investors, we have to guard against false certainty. ?We will be hurt more by wrong actions we take than by right actions that we miss. ?There’s more than one fish in the sea. ?If you can’t find a good opportunity, well, keep looking. ?Peruse 13Fs of clever investors for ideas. ?Look for good companies in bad industries. ?Those will make you different than the consensus.
Don’t ever feel forced into making an investment decision. ?If it is not compelling, pass it up and wait. ?Yes, time is money, but haste makes waste. ?Particularly where fear or greed is involved, there are real risks of making bad decisions. ?Channel your inner Vulcan, and be as dispassionate as possible.
There is a consensus in investing, but it is an abstract thing, and not easily measured. ?Don’t aim to be different than the consensus; aim to be right, because often the consensus is right, and there is no reason to invest in a given company.
Full Disclosure: Long AIZ BRK/B
Hi David,
I always enjoy reading your blog.
It seems there are two points you are addressing here:
1) You don’t always have to act. Completely agree.
I don’t see how this is related to:
2) If you are making an investment in a specific stock, you do have to consider “why and how are my views NOT reflected in the current stock price?”
You can have 100% correct views on a company, but if they are all already priced into the market cap, there’s little value in those views (at that moment).
Too many value investors fall back to the reason “well, Mr Market is an idiot”. While I believe that Mr Market can over-react at times, I don’t think he’s a fool. Like you say, “the majority is often right, at least in the short run”, just replace “the majority” with “Mr Market”.
I don’t think that explaining why your views are not priced into the market cap goes hand in hand with a bias to action.
Now, your last sentence leads me to believe that your real emphasis is that you should strive to be right first and foremost. I can agree with that. And, it’s only in those infrequent cases where you are right AND your views are not priced in where you will make a profit (credit to Howard Marks for stressing this point in his public communications).