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

reminiscences of a stock operator pdf

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

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About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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