Post of the Day
December 28, 1999

Board Name:
Berkshire Hathaway

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Subject:  INDEPENDENT THOUGHT
Author:  simpleinvestor

Thinking for yourself, independent of what others think or say is a very important investment concept.

Most of us are looking for validation of our thoughts, beliefs, emotions, philosophies, actions, inactivity, and principles particularly when it comes to our money and our investments.

If you're like me the first thing you look at in the stock pages are the Dow averages and/or the most actively traded issues (the volume leaders). This is what everyone else is doing. This is a summary of groupthink.

The collective summary of how you, everyone else, and I think and act in the stock market is the market. The only way to beat the market over time is to have independent thought.

It takes a lot of willpower, courage, strength, energy, power, and confidence to move against the crowd.

GENETICALLY INFERIOR:

Most of us (fortunately not all of us) are wired to concern ourselves with others. Peer pressure becomes such a strong force during our teenage years some have been known to turn against their own mothers.

Genetically we have learned to survive by forming communities, laws and rules of behavior. We patronize restaurants based on being voted the best by local readers, restaurant critics and or a panel of judges.

We concern ourselves with critical reviews and top grossing movies. We read books because they are best sellers. We are a society caught up with ratings, stars, rankings, and rave reviews.

Why should our investments be any different?

Investors want to be ahead of change. Ahead of everyone else. We want our stocks in the news, heralded by the media, talked about on Wall Street Week, on the cover of Forbes, going from a few dollars to a zillion overnight.

We have been failed by our own genetics to be successful investors. We are taught to think and act like the collective.

We honor conformists while they are living and non-conformists only after they are dead.

INSTITUTIONS:

By definition institutions are the market. They buy and sell in such large blocks that it is a rare breed that is able to outperform the collective. Institutions are not rewarded for thinking independently. They also are cursed by size. Institutions, the market and groupthink can all be used interchangeably.

Institutions suffer from crowd psychology. They need to please the crowd or suffer the wrath of acting out of order.

MUTUAL FUNDS:

Nearly 45% of investors prove groupthink by owning and trading mutual funds. I too fell prey to this investment style.

I maybe like some of you, bought the best selling and best performing mutual funds one year only to watch them no longer be the best performing or best selling. This is the opposite of independent thought.

The collective is doing the same thing. They are reading the same information and making mutual funds best sellers by purchasing them based on past performance and star rankings. Groupthink and group actions will eventually be the reason a particular mutual fund is no longer a star performer. Too much success brings the attention of the group and the group throws too much money at the fund chasing previous performance. A vicious groupthink circle.

This is the curse of groupthink. Success attracts group thought. Groupthink buys previous performance. The fund attracts too much money. The fund no longer is in the top quartile. The fund falls from grace. The groupthinkers move on.

If one mutual fund is good why not two, three, half a dozen or more? This is group groupthink.

And to trade mutual funds like stocks is groupthink gone way wrong.

A wise group thinker will at least own an index fund because this matches group thought while minimizing transaction costs, management fees, and taxes. Index funds should be the investment of choice for collective investment thought.

Mutual fund rating services like Morningstar and financial magazines like Money prove the attraction of groupthink. They offer ratings of funds to help other followers buy what everyone is buying. The financial media and industry honors groupthink and discourages independent thought.

GURUS:

If you follow any guru, watch CNBC, subscribe to any financial newsletter, own a basket of mutual funds, own a mutual fund because of a previous manager, subscribe to a newspaper because of the founder's investment style or principles you are doomed to market under performance.

Gurus are not compensated to give you market out performance. Gurus have no measurable audited public record. If gurus were smart investors they would be rich and have no need to explain their 'superior' investment strategies to complete strangers.

Isn't it amazing how we hold complete strangers and gurus in such high regard and dismiss others who may have our best interest more at heart. Experts, gurus and strangers are always from more than 50 miles away never from our hometown.

MOMENTUM TRADERS:

By definition momentum traders suffer from groupthink. They buy momentum. They focus entirely on what everyone else is doing and mimic everyone else.

Momentum traders buy that which is going up with the hope that it will go up some more to sell it to someone else at an even higher price.

Day traders are momentum traders on steroids. They suffer the most from groupthink and are rewarded on the short-term.

Momentum trading is easy in a rising market. Just like a rising tide lifts all boats it doesn't take a genius to pick any NASDAQ stock when it is rising 70% a year. A blind monkey could throw a dart at the NASDAQ and make money by trading in such a market.

Investing skill is only tested over time. The longer the time period the greater the test of skill.

MARGIN INVESTING:

A friend believes that if an investment like Berkshire is 'guaranteed' to return 15% a year and margin rates are 7% why not invest in Berkshire and keep the 8% difference.

Simple concept difficult to execute.

My friend's biggest challenge is he is caught up in what I think, what Warren Buffett thinks, what Charlie Munger thinks, and what everyone else thinks about his margin investing theory. He went as far as Omaha to ask Mr. Buffett what he thought about margin investing after the special meeting to approve the GenRe merger. Warren said he thought it was a terrible idea.

If everyone else thought it was a good idea then everyone else would do it and therefore the greater the likelihood of getting the same results as everyone else (the market).

WHERE DO YOU GET YOUR BEST IDEAS?

Don't know about you but all of my best ideas have come from independent thought. Stockbrokers, accountants, attorneys, registered investment advisors, newsletter editors, financial columnists, gurus, mutual fund managers, CNBC anchors and guests, have never given me great investment ideas.

Mostly they help me understand what everyone else is doing. What the market is doing. What the collective thought is.

MY BEST INVESTMENT IDEA:

My best idea came not from following collective thought or groupthink. But rather by spending quality time with myself asking a few key questions.

My best investment idea came from self-discovery. From asking who is the best at investing and is he available to manage my money?

How much does he charge? What are his investment principles and do I agree with them? What can I read about him? Is his performance of public record and audited? How has he been able to outperform groupthink (the market)?

Is his interests aligned with mine?

Am I the best at allocating my own capital or is there someone else who is better? Just because it's my capital does it make me the best at redeploying it?

Nobody called me up and said this is "The World's Greatest Investment". The manager himself has never recommended his own stock even though he and his family have 99% of their net worth in the company.

The manager never has and never will recommend this investment.

The best stockholders are the ones who arrive by independent thought. The best owners are the ones who have little concern for groupthink (the market) and every concern first for the market price in relation to intrinsic value and then for what the underlying businesses are doing.

The best owners use groupthink to compare how their independently thought investments have done over time. Groupthink as a comparison not as a source of investment ideas.

ULTIMATE INVESTMENT OF INDEPENDENT THOUGHT:

Berkshire is the ultimate investment of independent thought.

It doesn't matter what PaineWebber or First Boston thinks about Berkshire. It doesn't matter that the marketplace has high regard for our chairman and little regard for Berkshire's stock.

It doesn't matter that groupthink believes Berkshire is about one man and when that one man 'retires' the stock will be worthless.

It doesn't matter that groupthink rallies a short-term knowledge of a stock Berkshire is rumored or even known to have purchased yet undervalues the parent company's stock even though it just finished buying the very same hot stock.

It doesn't matter that groupthink doesn't get Berkshire. It doesn't matter that recent shareholders arriving via the GenRe stock conversion don't have the patience to hold and forget that share-hold-ers have the word 'hold' in the middle of it.

Current shareholders are better served if short-term traders sell off the stock and depress the market price. One, owners can buy more at attractive prices and two, the lower price reveals the true intentions of the converted shareholders. They may be share-trade-ers in disguise.

All in all Berkshire is better off if it has a group of shareHOLDers that arrived by independent thought.

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