One of the best ways for individual equity investors to succeed in the equity markets is to avoid “Black and White” thinking.
The market is rampant with herding behavior. Something happens and almost everyone shifts their thinking in rapid succession. If the market were a ship, the ship would be sunk with the majority of the passengers running to one side of the boat. “Man overboard!”
Let’s take hard drives for example. When solid state drives (SSD’s) came out, the spinning drive makers’ stocks dropped because “everyone is going to switch to solid state drives today”. It was a great time to buy those stocks. This created opportunity. Yes, there will be a transition to SSD’s over time, but it wasn’t going to happen overnight. The question is are those spinning drive manufacturers focusing on the eventual transition to SSD’s?
Let’s look at the Amazon issue. The market was treating the brick and mortar (B&M) businesses like Amazon was “taking over the world” and the B&M stocks got pounded. Some B&M businesses will fail and some should. We have definitely been in an “over retailed” environment for a while. The question here is does the B&M retailer have a particular strength – “a competitive moat” and is management moving and shaking with the evolving environment. Lots of babies got thrown out with the bathwater! Another opportunity to pick up bargains.
Recently I added to my position in General Mills. Here we go again. The herd said all branded consumer product companies are going to be crushed. Yes, they are losing market share to the natural food phenomenon, but can they evolve their business? Do they have forward thinking management who can change with the times? I think so. Once again, this herding creates opportunities. I like Cheerios and I am not likely to stop eating them. I don’t think a whole lot of other folks will stop either.
Portfolio managers usually have to follow the pack because they are often highly judged in the short term. This is why herding is so pervasive. If they don’t perform in the current quarter or year, they lose assets because of their fickle investors. The fund owners will leave them. Too much outflow and the portfolio manager could be out of a job. But, individual investors can buy the great deals that the herding behavior creates. But, you have to have a vision and a longer term outlook.
I love Apple’s slogan “Think Different”. Add some color to your thinking today. The world looks much better in color.
Now, I have to get back to my breakfast of Cheerios. As the English say, “Cheerio”!
