If you have been paying attention to the market, some of the punished stocks in the energy sector have been recovering handsomely during the week. Among these I find Seadrill Limited (SDRL) and Atwood Oceanics (ATW). Now, this has made me think, what happened to the fear that flooded the market just a couple of weeks ago? How can the perception of a company change so quickly without any material information being disclosed? In my opinion, investors who have been reaping profits have followed some of the tenets that Warren Buffett laid out during the Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) annual meeting in 2005.
"Ben Graham said you’re neither right nor wrong if you’re investing with the crowd – you’re right if your facts and reasoning are right. Once you have the facts, you have to think about what they mean. You don’t take a survey.
You should focus on what’s important and knowable. There are many things that are important but now knowable, like whether there will be a nuclear attack tomorrow. You can’t focus on those.
As Ben Graham said in chapter 8 of The Intelligent Investor: The market is there to serve you, not instruct you. If it does something silly, it gives you a chance to do something. It just sets prices. If it doesn’t give you an opportunity, go play bridge and come back the next day. And the nice thing is that the prices will be different."
So I believe that to reap profits in the market, some lessons can be taken from Buffett's comments (I also included one of Charlie Munger's):
Get your facts and reasoning right: The first thing is not to ignore the market, because that would be like ignoring the pitcher. However, if we silence the crowd, which is the constant noise that we receive from others' opinions, we get the time and set of mind to reason and think clearly. Only by gathering objective data by ourselves can we then form an opinion.
Step away from the crowd: I believe that one of the downsides of technology is that opinions are readily available, and it is very likely that we get a biased view if we use that over hard data, at least before we reach our own opinion. External views and comments are useful to avoid confirmation bias, as they could provide insights on why our thesis could be weak. Understanding these points and putting them into our heads to confirm or deny their effects can save us a great deal of trouble and money. I have noticed that some of the best investors just read away all day, gathering information and letting it compound in their heads. Making time to think is one of the best practices available to reach better and unbiased conclusions.
Seize the opportunities when available: The market is there to serve us, not to instruct us. This is one of the basic tenets of value investing. Great opportunities are rare, but when the ball is right in the middle at the right speed, all we have to do is take the courage to swing away, trusting our decision process. One of my favourite Munger quotes is: "Quickly eliminate the big universe of what not to do, followup with a fluent, multidisciplinary attach on what remains, then act decisively when, and only when, the right circumstances appear." Munger has repeatedly mentioned that when big mispricings occur (and we are able to recognize them as such), we should act promptly, because that is how the big money is made.
