Conviction #3: There is always more than one view - often times an exact opposite one

convictions Jan 26, 2022

Have you ever keyed in your order and about to click submit and started to have cold feet and pressed the cancel button instead? The thoughts go like this for me, when I look at the order book, I can see that someone is selling at the same pricing level that I am trying to buy. In fact, there are equal numbers of buyers and sellers on each side. Think about it this way, every last done price that you see represent a buyer who thinks the stock is going up and a seller who thinks it's going down. What's really interesting is that institutional investors today account for a large percentage of the trade in all major exchanges globally. In other words, there is a high chance that your counterpart may be a professional(a hedge fund, mutual fund, arbitrate desk or even program trading) instead of an amateur. It's unnerving to think that these professionals have an opinion that is different from yours.

Buy, Buy, Buy - The tendency of the sell-side to give a "buy" recommendation.

Another interesting fact is that most sell-side analysts' reports have a recommendation that says "buy". Anecdotal evidence suggests about nine out of ten. What that means is that you are predisposed to buy than to sell. That is not a significant problem, especially if you are thinking about buying quality stocks. Even if you get the thesis wrong, time will heal all mistakes. But what I hope this article will get you thinking is that you must go beyond the typically upbeat analyst's report and try to dig out that opposite view. It is always there, just being clouded out by the noise out there.

If ten analysts give a "buy" and only one that has a "sell", go read that "sell" report and see what it says. It will add tremendous value to your thinking process.

The professional who has that view will be making extra effort to hide that view from you. In fact, when I was working in fund management, we did not disclose what was on our buy and sell list. At least not like what you see on the blogging sphere, where such ideas can be described as downright promiscuous. Headlines like "Fives stock to buy now", "Ten stock for your retirement", "Three stocks that are about to explode". These attractive headlines should all be read with caution. In fact, I have a term for that; it's called Investment Pornography. I would be surprised if there isn't a clickbait hidden in there. These are advertising messages carefully crafted by a skilled copywriter and not an investment analyst.

There is always an opposite view.
For every bullist article in a magazine, newspaper, newsletter or blog, there is a different opinion somewhere else. Sometimes, it's not written publicly. When I was working as a bond trader in Yamaichi Securities back in 1996, I remember this incident when I asked my London economist for his outlook on the interest rate for Japan. My London economist's view is that rates are heading higher while my Tokyo Interest Rate Committee was calling for lower rates.

At that time, I found it really absurd. I thought my two colleagues were referring to the interest rate of a different country. How could two of my colleagues in the same firm put out two totally opposite views? Then I start to see the same thing happening in the investment industry all over the world. I observe this same thing happening in Merrill Lynch, Morgan Stanley and other big investment outfits.

Many years later, as I gained more investment management experience and has spent time observing and thinking about this, it became clear to me now.

There is always more than one view - frequently an exact opposite one.

How do we make a decision with such conflicting views?

In my stock investing classes at the stock exchange, I try to explain both the bullish and bearish views of the discussed issue. I outline all the reasons why the market or a particular investing idea should go up and why it should go down. I often conclude with, " If you are still not confused, then I haven't done my job."

The point is that when you are making an investment decision, sort out both sides of the story. When you do that and then make an investment decision, it is an informed decision with reasonable expectations and fewer surprises.

Don't be unsettled by an opposing view.
Earlier, we talk about making unnerving opposing investment decisions against institutional investors. Many of these institutions have a different investment objective than yours. Some, like the arbitragers and the hedge fund, might have a relatively short time horizon compared to yours. They could also be doing window dressing for year-end closing and a host of other reasons not related to the investment that they are selling. Maybe they need to meet a redemption request from a client. Maybe they need to rebalance due to changes in the benchmark constituent. The point is their selling has absolutely no effect on your investment decision. You have checked out both sides of the argument and then made an informed decision. Regardless of how wonderful the news is, there is always a seller at a price. And no matter how devastating the news, there is always a buyer at a price.

You could be right about your argument but still lose money.
Knowing that there is always someone smarter who takes an opposing view from yours can make it tough for the informed investor to act with confidence. What adds to the conundrum is that every news event can be interpreted both bullishly and bearishly. The same news can help some and hurt others. The Fed's decision to taper might imply the bond market will suffer, but you never know what other factors market participants are taking into account. Being an informed investor doesn't mean that you are sure to make money from that analysis. Getting our thesis about an investment right, especially in the short run, can be down to luck entirely. In the long run, however, getting it right every single time is going to be a Herculean task. Most people will fail to get it right at some point.

This means that it might be best for most to use the passive approach rather than the active approach.

Making Sense of The Investment Marketplace 

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