Talk About Money: Key to success is not following the herd

A reporter once asked Warren Buffett, the world’s greatest investor, this question: “Mr. Buffett, you are the richest man in the world, worth billions. Why do you wear cheap suits?” Buffett replied: “I don’t wear cheap suits. I wear expensive suits. They just look cheap on me.”
I’ve studied the ways of great investors and noticed that many of them are a bit nerdy and out of step. Benjamin Graham, Buffett’s teacher at Columbia Business School and the father of value investing, is said to have been emotionally detached from the rest of society. “Humane, but not human,” is how his wife described him.
Why is it that the most successful investors seem to be a little odd? It’s because being disconnected from typical human reactions enables them to avoid the herd mentality. Investing against the crowd has made Buffett a multibillionaire. As he puts it: “Be fearful when others are greedy and greedy only when others are fearful.”
In the year that just ended, we saw how investors who go against the grain can hit the jackpot, including one example right in our own backyard.
Try to think back on how you felt about investing in early March. The Standard & Poor’s 500 had plunged 38 percent in 2008 — the stock market’s worst year since the Great Depression — and was down another 28 percent in 2009. Many people had seen their 401(k)s cut in half and were thinking, “I’d better sell while I still have a few bucks left.”
In Scotts Valley, Seagate Technology shares had plunged to about $3, down from $27 just over a year earlier. The company was cutting jobs and had slashed its dividend by 75 percent. The personal computer market was in the tank, and bloggers were saying Seagate had missed the tectonic shift to mobile computing.
Investors were rushing to get out of Seagate and stocks in general. But as it turned out, March provided what another great investor, John Templeton, said he always looked for: “maximum pessimism.”
It turned out to be the best buying opportunity in decades. The S&P rocketed nearly 70 percent in the next nine months. Seagate soared nearly sixfold — what another famed investor, Peter Lynch, calls a six-bagger.
Investors had stampeded out of stocks in late 2008 and early 2009, then stampeded back in. Why?
Our impulse to follow the crowd dates back to our primitive ancestors. When one member of the group started running, others would follow, and that might have enabled them to flee an attacking lion. An out-of-step individual who didn’t follow the crowd and run became lunch for that lion and didn’t get to reproduce, so the herd mentality became ingrained in our genes.
But what worked for our ancestors on the plains of the Serengeti doesn’t help us to be better investors today. What 2009 taught us, once again, is that to excel as investors, we need to detach ourselves from the ups and downs of human emotion, and go against the crowd.
• Mark Rosenberg is an investment consultant for Financial West Group in Scotts Valley, a member of FINRA and SIPC. He can be reached at 439-9910 or [email protected].