BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “CONTRARIANISM”

01

Many investors are following the trend for making their investment decision but for becoming a superior investor, we need to think in an oppositely.

As we have seen that for becoming superior investors, we need to develop a skill of second level thinking. Second level thinking provides us an opportunities to generate above-normal returns and also protect us from the loss of capital. We need to think against the crowd because crowd generally operates at the basic level of thinking rather than the second level of thinking.

If we engaged in doing what others are doing then we also get what others are getting. So for getting superior from others, we need to think differently.

02

When we are joining the herd then following the herd can be dangerous to our financial health. When people are highly optimistic then prices started moving upward, top-level starts to form. And when people are panicky selling then prices started to go down, bottom starts get the form.

03

It seems much easier while we are understanding the concept but it is a much difficult task while we put it into the action.

1) We never come to know that how far pendulum will swing, when it will be reversed and how far it will swing to the opposite direction.

When pendulum starts moving towards an extreme then we are not able to know the extract extreme point and from where it will start reversing. Overpriced stock can become more overpriced and cheaper can become cheaper.

2) We can be only sure about the reaching of the pendulum to the extreme level. We can just make an estimation that pendulum will reach an extreme, reversed it to mid-point and move towards opposite direction where it will reach to another extreme point.

3) There are many points which can influence the market behavior, many reasons which make pendulum to swing and not anyone strategy which is always able to generate a higher returns.

04

There are many examples where we can able to see the overpriced situations but we cannot be sure that such situations will reverse from tomorrow and starts going down. It can remain more overpriced and can keep on staying to the same situations for over a period of time.

Expensive

Cheap

We can able to see that expensive stock remains expensive for the longer period of time and cheaper get cheaper over a period of time.

Also, we cannot always go and make a decision to do the opposite of what everyone is doing. We cannot start walking backside as everyone is walking towards the front side. Just doing opposite of what everyone is doing, does not provide us profit-making opportunities. We need to analyse and make a logical reasoning then reach to the conclusion that we should go opposite or not.

Lossing money

If we just do opposite of what others are doing without doing proper homework then also we can able to lose our financial wealth. So that it is not only to take contrarian decision is enough but with it, proper homework is also required.

Sugar

If some assets are temporary getting hate by people & with our proper homework then making a contrarian decision on it help us to generate an above-normal returns.

If everyone like some idea than probably it has done well or doing well. And if everyone is liking some ideas then prices reflect those liking. So much risk involves when crowd changes their mind.  Price can fall significantly due to change in the mind of the crowd; which is harmful to our financial health.

We can able to create above average returns when we can able to buy an investment at the substantial discount. And the discount is available only when the major crowd is not liking it, not at where everyone is liking it.

05

For the protecting our financial health, we require having a skeptical mindset. When we skeptically analyze any situations then we will not fall in trap with the crowd. We have to always keep in mind that what can happen and what is the probability of occurrence of those events.

When a crisis happens than actually, we can able to see & believe in the negative side of the market. But we have to skeptically think regarding the negative side when positive waves going on. We always need to think that what can go wrong while everything is going in a good way.

06

If we believe in the story prevails among the market then we will definitely do what others are doing. We will tend to buy an investment at a high price with expectations of generating higher returns. We keep on buying overpriced securities with an expectation of another great fool will buy it from us. But we always need to keep in mind that while we are buying overpriced assets then we are only the great fool, no one else.

We will buy things which doing well and sell which performing poorly. Such actions resulted towards the losses during the crisis time, also we might not able to take benefits when things recover from the bottom. We remain followers not able to become contrarian.

We need to be skeptical enough for identifying the aspects that which is good for creating wealth and what is not good for it.

07

If we keep on follow the herd then we will not get a chance to evaluate situation skeptically and we will lose while the optimistic situation turnout as a pessimistic situation.

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