Robert Cialdini – Just How Do Uncertain Investors Pick Their Stocks

The simple truth is that a lot of investors don’t have the time or won’t make the time to research the companies in which they’re going to invest. So how do uncertain investors pick their stocks? One answer can be found in the book, Influence: The Psychology of Persuasion, by Robert Cialdini. Here’s an excerpt from the book:

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Influence by Robert Cialdini

Influence: The Psychology of Persuasion by Robert Cialdini

We first need to understand the nature of yet another potent weapon of influence: the principle of social proof. It states that one means we use to determine what is correct is to find out what other people think is correct. The principle applies especially to the way we decide what constitutes correct behavior.

We view a behavior as more correct in a given situation to the degree that we see others performing it. Whether the question is what to do with an empty popcorn box in a movie theater, how fast to drive on a certain stretch of highway, or how to eat the chicken at a dinner party, the actions of those around us will be important in defining the answer.

The tendency to see an action as more appropriate when others are doing it normally works quite well. As a rule, we will make fewer mistakes by acting in accord with social evidence than contrary to it.

Usually, when a lot of people are doing something, it is the right thing to do. This feature of the principle of social proof is simultaneously its major strength and its major weakness. Like the other weapons of influence, it provides a convenient shortcut for determining how to behave but, at the same time, makes one who uses the shortcut vulnerable to the attacks of profiteers who lie in wait along its path.

In general, when we are unsure of ourselves, when the situation is unclear or ambiguous, when uncertainty reigns, we are most likely to look to and accept the actions of others as correct.

In the process of examining the reactions of other people to resolve our uncertainty, however, we are likely to overlook a subtle but important fact. Those people are probably examining the social evidence, too. Especially in an ambiguous situation, the tendency for everyone to be looking to see what everyone else is doing can lead to a fascinating phenomenon called “pluralistic ignorance.”

[In social psychology, pluralistic ignorance is a situation in which a majority of group members privately reject a norm, but incorrectly assume that most others accept it, and therefore go along with it. This is also described as “no one believes, but everyone thinks that everyone believes”.]

Article by Johnny Hopkins, The Acquirer's Multiple



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The Acquirer's Multiple
The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”