The pain and agony of a "social misfit" and why value investing works

On Monday, i was invited to a gathering of private bankers at a club. It was a networking session for private bankers in general to get together and have a good time and it wasn't just exclusive to private bankers , there were investment specialists and research analyst and a couple of investment bankers hanging out there too.

The word that got around most was speculation of which financial companies were going to go next. Some were saying Fortis was going next. In fact half a year back, someone told me that Merril was next to go but Merril was eventually acquired by Bank of America. The general theme of talk among the bankers seem to be that of "fear" and a random poll by me as i spoke about buying stocks from a valuation perspective was scoffed at mostly. And if it wasn't scoffed at, there were some who might agree with me but they will do so on the quiet, not echoing their views out loud.

And as i examined myself in the situation, i found that there there was tremendous group think and pressure to conform and i found myself a social misfit all of a sudden. And i remembered what i had read about psychology. There is a tremendous need to be part of a group and to be like the group. We need social proof to carry on our activities. It is like a cushion and some form of security. We do what other people do and find comfort in that. Because if we are wrong, it's ok because the others are wrong also. It is a very powerful force at work here and you will see it working in nearly every aspect of society. In fact there was an article "Rejection really hurts" Participants that were participating in a virtual ball tossing game who were eventually excluded seemed to experience some form of stress. For more read here:

Rejection really hurts

Value investing will put you in a similar situation. When markets head south, folks will tell you to stay away or sell. Not many will tell you to put a portion of your net worth into equities. In fact, going against the crowd probably means that they might incur some losses intially.Mohnish Pabrai talks about this and says:"When I buy a stock, two things ALWAYS happen: immediately after I buy, the stock tanks and once I sell the stock, it really takes off" Value investor must be able to take this and stomach "social pain" if their reasoning is right.

I have had the pleasure to meet with Professor Sanjay Bakshi recently during his trip to singapore and i would say that i have learnt so much from him both from a practical standpoint as well as an academic's standpoint. I would like to leave you with a quotes and conclusions by him in one of his articles:

"I think value investing is successful precisely because it is difficult to practice. What I have said it is easy for you to understand, but I can tell you that is not easy to practice.
I think it is successful because it's unpopular and because it is based on fundamentals and not stories that read about or hear or see on CNBC.
I think the value of value investing lies in its unpopularity and I think if value investing became popular there won't be any value left in it."

Best regards,
Lucas