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About simple answers to complex questions
There is a military saying: "Orders that can be misunderstood will be misunderstood."
At first glance this may seem funny, but when faced with the real consequences of ambiguous interpretations, people are not in the mood for jokes.
This has also happened in the stock market. Peter Lynch, the legendary manager of the Fidelity Magellan mutual fund, earned a staggering average annual return of 29.2% while managing the fund for 13 years.
In the 1980s, journalists approached successful investors and asked how they managed to regularly find “X” in the market. A company is a company that, after buying its shares, grows tens or hundreds of times, bringing multiple profits. For example, Lynch liked to buy his wife inexpensive and durable stockings in some stores, and he bought shares in these stores, which subsequently brought him huge profits. Or you go to a local restaurant, praise its food and service, and invest in the restaurant’s shares, which soon grow by 500-1000 percent.
What could be simpler than that? A great product or service, lots of satisfied customers – that’s all an investor needs to make a decision. That’s how Peter Lynch’s most popular myth was born. “As a consumer, you can’t go wrong if you buy what you like!”
This myth has proven so persistent that its influence has grown many times over in the 40 years since, as unprecedented wealth growth and technological advances have made investing accessible to billions of people around the world. That’s because the myth exploits a gaping hole in human thinking called the availability heuristic. The idea is that people always want simple answers to complex questions.
This explains the popularity of such companies as Detsky Mir, Yandex, Tinkoff, MTS, Facebook (banned in Russia), Apple, Tesla, Google, McDonalds, etc. among Russian investors. Why these? They simply have many consumers, and investors, considering the possibility of buying their shares, answer simple but wrong questions. "Do I like these products and services?" It's complicated, but true. "Is it in my interests to now be a co-owner of this business?"
Meanwhile, in his 1989 book, The Peter Lynch Method, the "author" of the myth wrote:
"...one of my ideas has been misunderstood. Peter Lynch never recommended buying products from your favorite store just because you like shopping there. Likewise, you should not buy stock in a manufacturing company because it makes your favorite product, or stock in a restaurant because you like their food. If you like a store, product, or restaurant, that is a good reason to be interested in the company and add it to your list of things to research and analyze, but it is not enough to just buy the stock! "Don't invest in a company until you have gathered information about its prospects, financial condition, competitive position, expansion plans, etc."
Unfortunately, this explanation does not fit the simplistic and therefore incorrect interpretations that the financial industry, including all journalists, analysts, bloggers and other writers, happily seizes and uses for their own selfish interests. And everyone is happy. Investors think they are making a good investment. The industry takes their money. The wolves are well fed and the sheep are still safe. Why change anything?
But there is a way out. Don't be like the majority and avoid oversimplifications. Knowing the biases of investor thinking and carefully studying the business can lead to consistent success in investing.
My website: asdorzhiev.ru.
My new analytical project "The practice of investing in shares and bonds"