In a roaring bull market, value investing does not work. Because all the metrics of value gets thrown out the window. When people see that their dumb neighbour gets richer faster than them, greed sets in, and invites herd mentality to take over. People just don’t want to be one upped by other people they don’t respect. So they try harder to get richer faster and there are consequences for that.
A bull market needs a lot of participants to continue its gallop. First, you need the people who are willing to throw logic to buy a stock. Next, you need the cheerleaders who chants, buy and hold and buy high sell higher. Next you need the gurus when in times the valuation seems off the charts, a soothsayer that would calm the people, making the people think that everything is all according to logic and the bull and prosperity is just around the corner for all of us.
The Rise of the Gurus
The gurus in particular are an interesting bunch. If you’ll notice, most of them you’ll never hear in a bear market. Nor would they be a pessimist or a bear in a bull market. As far as I’m concerned, most gurus today (in the Philippines), came out in the year 2010 or 2011 just after the great recession, just when the bull market is starting. And majority of those gurus came out 2016.
These gurus teach investing (or trading) and charge money for the knowledge they impart unto the world. Most of them charge membership fees for stock signals.
Today we can see this industry booming. A lot of seminars. A lot of guru talks. Stocks signals and what not. Teaching beginners how to lose mon.. I mean, how to make money investing / trading in stocks.
The Guru’s Power
The guru’s power lies not in his forecasting. Even if he sells his stock signals, it seems like its as effective as a coin toss. For example, a guru who only recommends stocks that are included in the index, may convince illiterate people about his power of forecasting. While as in a bull market, index members do go up. So a BUY recommendation for stocks that are included in the index is not skill nor luck. This proved to be true when BUY recommendation are issued for stocks that are not included in the index, where the risk is higher and more research is needed than buying index members in a bull market.
For a knowledgeable investor, he knows when someone is really good at what they do, when all the factors that affect the stock’s rise is excluded. In other words, in a bull market, everything goes up. So buying a stock, particularly index members, does not illustrate skill. But beating the index for 10 years, in bull and bear markets, demonstrates skill.
The guru who recommends to BUY CHP after losing -70%, blames “Black Swans” for their demise. The sheep listens and agree, without even knowing the meaning of “Black Swans”. The guru continues to this day.
Gurus Add Fire
The more the stock market goes up, the more seminars they offer. Its about sending the message of investing. Save your money, invest for the future as time in the market is more important than timing the market. I believe this is true. But only if you got in early.
Buy and hold is a great strategy if you bought at the right price. If you bought at the peak, it doesn’t make sense. But if you bought at the bottom, there’s little risk and a big upside, so buy and hold works. But most people can’t distinguish when to use it. They think that buying Jollibee at 40 P/E and holding it for the long term is a strategy. I think, its blind faith. I may be wrong, but there’s a high chance that Jollibee is overvalued that there’s a lot of risk to lose money even if the company is a great company.
The gurus add fire to enthusiasm. A company that trades 40x PE is promoted by a guru not because of any logical metric. But because of a story and optimism. A guru who recommends to buy Jollibee at 300 pesos said “Every Filipino should own a piece of the Philippines by buying Jollibee” was never accountable for the fall that will happen. And these people who believe these gurus are the victims.
Gurus Become Stars
When gurus gain popularity, not because of accurate forecasting, but by optimism and charisma, they get invited to talk shows and conferences. And they add to their credibility. Now they get compared to geniuses. People begin telling them they are the “Warren Buffett of the Philippines”. Its kind of a stretch and cringey but it does happen. They form groups of fans and loyal believers. It becomes a cult, a religion.
Since they are gurus now and people listen to what they say, they can only say of good things about the stock market now. And they can only be a bull. Once they speak of bears, they may lose those tv guestings and book deals. And many people may quit their signal service. After all, if they are bears, why recommend to buy any stock?
When stocks go up, the guru’s credibility is never questioned. The guru becomes the source of reason why the stock market must go up from the already high valuations. But things don’t go up forever.
The people who believed the gurus will soon find out that its painful to lose money. They will need a scapegoat. They need someone to blame for their misery. And the guru will be cast aside, ignored and hated. People will never forget who recommends them a stock that went down. But there are still some people who are enchanted by gurus. The black swan guru I talked to you about still have loyal followers. But I guess some people really never change. But in general, people will hate the gurus at the end of the bull, when the crash happen.
The Lesson to All This
Just don’t believe any gurus. Especially if they tell you what stocks to buy. The gurus I follow like Warren Buffett, never ever wants to talk about a stock. It seems that the really skilled investors avoid talking about a particular stock when they have them. But are willing to only talk abut them when they have exited the position. The reason for that is psychological. But let this be a lesson to all. Real geniuses, never talk about stocks, nor recommends you to buy or sell any particular stock.
I’m going to leave you with a story:
I frequently tell the apocryphal story about how Max Planck, after he won the Nobel Prize, went around Germany giving the same standard lecture on the new quantum mechanics.
Over time, his chauffeur memorized the lecture and said, “Would you mind, Professor Planck, because it’s so boring to stay in our routine, if I gave the lecture in Munich and you just sat in front wearing my chauffeur’s hat?” Planck said, “Why not?” And the chauffeur got up and gave this long lecture on quantum mechanics. After which a physics professor stood up and asked a perfectly ghastly question. The speaker said, “Well I’m surprised that in an advanced city like Munich I get such an elementary question. I’m going to ask my chauffeur to reply.”
In this world we have two kinds of knowledge. One is Planck knowledge, the people who really know. They’ve paid the dues, they have the aptitude. And then we’ve got chauffeur knowledge. They’ve learned the talk. They may have a big head of hair, they may have fine temper in the voice, they’ll make a hell of an impression.
But in the end, all they have is chauffeur knowledge. I think I’ve just described practically every politician in the United States.
And you are going to have the problem in your life of getting the responsibility into the people with the Planck knowledge and away from the people with the chauffeur knowledge.
And there are huge forces working against you. My generation has failed you a bit… but you wouldn’t like it to be too easy now would you?
Be on the lookout for chauffeur knowledge. Do not confuse the company spokesperson, the ringmaster, the newscaster, the schmoozer, the verbiage vendor, or the cliché generator, or the guru with those who possess true knowledge. How do you recognize the difference? There is a clear indicator: True experts recognize the limits of what they know and what they do not know. If they find themselves outside their circle of competence, they keep quiet or simply say, “I don’t know.” This they utter unapologetically, even with a certain pride. From chauffeurs, we hear every line except this.