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Consensus: What It Means, And Its ‘Role’ In Your Investment Process

By David Merkel, CFA of Aleph Blog

At a recent investment competition that I attended, one of the judges asked the question to all teams, in a somewhat long-winded way, “How is your opinion different than the consensus?”  Perhaps because I have heard it for too many years, I got a little tired of it.

So what is the consensus?  There is no “consensus” document that is publicly available.

  • The consensus could be any collection of factors that justifies the current market price.
  • The consensus could be generally agreed upon ideas of a large majority of “sell side” analysts.
  • The consensus could be a few critical factors that are widely agreed on.

A correct insight that is different from that of the majority is valuable.  But the majority is often right, at least in the short run.  I often found as a buy side analyst that some sub-industry sectors were rationally priced and there were no plays to be made.

Therefore I would say don’t force yourself to be different from the consensus.  If you have good reasons to be different from the consensus, pursue those views.

Sometimes the best answer is, “I don’t know,” or “This seems fairly priced to me.”

You don’t always have to make a decision.  Even Warren Buffett has a “Too Hard” pile for documents.  As an aside, he tossed Assurant into the “too hard” pile, while I immediately embraced the IPO.  And yes, I did have a view that was different than the seeming consensus.

Some say, “Not to Decide is to Decide.”  Well, yeah, but as investors, we have to guard against false certainty.  We will be hurt more by wrong actions we take than by right actions that we miss.  There’s more than one fish in the sea.  If you can’t find a good opportunity, well, keep looking.  Peruse 13Fs of clever investors for ideas.  Look for good companies in bad industries.  Those will make you different than the consensus.

Don’t ever feel forced into making an investment decision.  If it is not compelling, pass it up and wait.  Yes, time is money, but haste makes waste.  Particularly where fear or greed is involved, there are real risks of making bad decisions.  Channel your inner Vulcan, and be as dispassionate as possible.

There is a consensus in investing, but it is an abstract thing, and not easily measured.  Don’t aim to be different than the consensus; aim to be right, because often the consensus is right, and there is no reason to invest in a given company.

Full Disclosure: Long AIZ BRK/B

Consensus: What It Means, And Its 'Role' In Your Investment Process