Last Updated on December 2, 2024
Overview
Imagine you are interested in NVIDIA, and you want to determine if NVIDIA is worth investing in or not.
Fortunately, you don’t need to perform the analysis yourself. You hire 100 investors and ask them to perform an investment analysis on NVIDIA, with every investor having access to the same information.
Upon receiving the analyses of all 100 investors, you notice that each analysis is different. Some may share similarities, but each has its own nuances.
Even worse, there is no consensus on whether to buy or sell. Both sides bring up valid arguments for their respective course of action, and so reaching a consensus is practically impossible.
This finally begs the question: which investor, or group of investors, is correct, and why? Not only that, but how do you know if an investor is more correct than another?
At the end of the day, you are the one who must make the final decision.
Learning to Think for Yourself
Allowing one’s emotions to override logical thinking is an investor’s arch-nemesis. Nothing spells disaster faster for an investor than deferring their decision-making to their heart and not their head.
Although getting overly emotional will almost certainly guarantee an investor’s failure, there is no single variable that will guarantee an investor’s success. Lots of variables act in unison that will ultimately help an investor create a formidable portfolio.
One of those variables is the ability to think for yourself.
Investing is not an activity where you increase your chances of success by asking as many people as you can for their advice.
When it comes to investing, if there was a certain path to make easy money, then everyone would know about it.
If making millions of dollars from the stock market was as simple as asking people about their opinion on certain securities, then there would be no need for the thousands of books, articles, and other media that discuss investment analysis.
What one investor views as important may be meaningless in the eyes of another. Similarly, what one investor views as a bargain, another may view as an investment to stay as far away from as they can.
Everyone has their own experiences, knowledge, biases, and values. That is why no investor will ever have the exact same analysis as another.
To avoid this problem of filtering out other investors’ biases, the only remaining option is to perform your own analysis and to draw your own conclusions.
How Do I Know if I’m Correct?
After performing your own investment analysis, it doesn’t take long to realize we are back at our original problem: with respect to other investors, how do I know if my analysis is correct?
Some investors may agree with your analysis, others may not, how do you know who to trust?
Benjamin Graham addressed this issue directly in The Intelligent Investor when he said:
“The stock investor is neither right or wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.”
Put another way, an investor is free to argue for or against the merits of a security, assuming they have the facts to reinforce their claims.
The beauty of investing is that an investor does not need to succumb to popular opinion. Any sentiment towards an investment is valid so long as an investor can back up their claims with the appropriate facts.
No Investor is an Island
While performing your own analysis and coming to your own conclusions is important for every investor, this does not mean an investor must shut out the rest of the world.
No matter how intelligent an investor may be, it never hurts to exchange ideas with other investors. Perhaps other investors may provide you insight you didn’t previously consider or notice.
At the time of this writing, an investor reached out to me on Reddit. This investor and I are both interested in REITs, and have agreed to bounce ideas between each other when it comes to REITs and any other securities that are of interest to us.
Almost every investor knows about Warren Buffett, but not as many people know about his close friend and second in command at Berkshire Hathaway, Charlie Munger.
Buffett has repeatedly praised Munger for his sharp intellect, stone-cold rationality, and his ability to keep Buffett at bay.
The two investors are known to frequently exchange ideas with another, and to challenge each other’s investment ideas when they seem shaky.
I strongly encourage every investor, especially young investors, to have at least one person they can talk about investing with seriously.
This person should be able to challenge your analyses, provide the insight you previously did not have, and exchange ideas with you freely.
At the end of the day, the decision to buy or sell an investment lies solely with the investor, and no one else. However, this does not mean discussion or the exchange of ideas should be prohibited.
Make Your Position Known
There is no shortage of articles or investment gurus who try to peddle “investments” to the uninformed.
A quick google search of “stocks to buy 2021” will quickly inundate you with articles and videos of people trying their best to sell you the next big thing.
If you decide to read one of these articles and a company you are interested in appears on the list, how do you know if the author’s analysis is worthwhile?
This is where your own detective work comes in. By performing your own analysis, you have a benchmark to compare whether there is merit to any other analyses you come across, relative to your own work.
By firmly establishing your own position on investments of interest, you can effectively weigh the merits and demerits of other analyses.
Just because someone else’s analysis may attempt to disprove yours, it does not mean you are incorrect. Similarly, just because you find another investor who shares the same sentiment as you does not mean your analysis is immutable.
Wrapping Up
Give 100 investors the same information to pore over, and you’ll end up with 100 different analyses.
Every investor has their own biases, different levels of investment knowledge, and different values. What one investor views as important, another may not even bother considering.
The merit of an investor’s analysis does not depend on what others think about it. An investor’s analysis is as good as the logic and facts they possess to back up their claims.
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