At a more basic level, one thing most people will agree with is that 'nobody's perfect'. Humans and human nature are susceptible to a number of influences that can sideline the most rational and logical thinking. Everyone would like to think of themselves as a rational logical person, but try as we might, emotions can play havoc with our best intentions. Emotions have the power to alter the way we look at everything around us and the irony is, at that point of time, we may not even realise just how much our judgment is being swayed by emotions. When one is euphoric about some good news one's just heard, everything around starts looking good. To the point that we may even end up overlooking some flaws/negatives that we originally knew existed. Conversely when gloomy and depressed, those very same flaws may look disproportionately big. So what's happening here? Greed, envy, gloom, euphoria, fear, relativity, and the like are the ones pulling the strings.
And that tendency of ours is only further exacerbated when everyone around us is being manipulated by the same bunch of emotions. You might have thought a glass of water is half full if you were to see it by yourself, but when thrown into a room full of people, all emphatically expressing their displeasure at the same glass being half empty, the same glass may start looking different to you.
There is no better platform then the stock markets to see all these limitations of human behaviour and its various forms of folly in its utmost detail.
What we've seen happen in the recent past in the markets can serve as a very good example. It is the same country, the same companies, the same set of people managing those companies, the same brands that have been carefully built over many years; all SUDDELY began to look very gloomy.
January 2008: Everyone's very confident about achieving a protracted annual 40% return from the markets. No questions asked. No level of price is high enough for one to have any reservations in buying into a popular company.
November 2008: After most companies, good and bad, saw a drop of over 50% on an average in their valuations, people were still very wary of putting their money in them, surrendering to a deadly concoction of stories of doom and gloom to justify their pessimism. For companies that were fundamentally unhealthy and were given undeservingly higher valuations - rightfully and understandably so.
But what about the strong, quality companies with large moats and good earning power, those that have consistently delivered through times good and bad. Surely, an impressive record over the past 10 years on all the important aspects of a good business would count? The answer was NO. The pendulum swung once again, but this time to the opposite extreme. These companies' valuations got swept away like the rest of them, many of them to an unjustified and irrational extent.
But people did not seem to be in the mood to take notice of this fact. And even for the ones who would begin to think of it, they would receive enough of brain washing from everyone around to discount their own ability to think.
There are many who have a great deal of technical and academic expertise in investing. But the most successful investors over an extended period of time have been the ones who fiercely guard their independent thinking, thus making a conscious attempt not to yield to the whims of the crowd. They are the ones who realise the nuances of how one's emotions can lead to faulty decision making. More so when this applies to a big mass of people all trying to outguess each other. They not only realise this but go one step further and take advantage of this.
When buying or selling shares of a great company at fair price, never make the mistake of waiting for the rest of the world to validate your judgment. Because that is a mistake that can make the difference between investing success and failure.