Breaking Bread = Better Investing: Check out why this is a necessity for investment success!
Every Wednesday, we publish articles about great investment tips and strategies with hopes to help you get on the path towards true financial freedom. Today, we’ll talk about how a religious dining tradition is connected to investing. Continue reading below. We’ll discuss how you can be a better investor with the help of this insight.
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Breaking Bread = Better Investing: Check out why this is a necessity for investment success! In Christianity, there’s this tradition called, “breaking bread.” This was mentioned in the story of Jesus eating with his disciples during their last supper together, and in the book of Acts, when the author described the apostles as devoting themselves to teaching, fellowship, breaking of bread, and prayer. Since then, “breaking bread” means more than just eating. It also means making meaningful connections over a meal, fostering a sense of brotherhood or sisterhood with someone or a group of people.
According to Professor Joel Litman, Chairman and CEO of Valens Research and Chief Investment Strategist of Altimetry Financial Research, breaking bread with someone helps you become a better investor. Why? When you talk to someone over a meal, you learn to consider viewpoints beyond your own, and that can lead to significant connections. The act of sitting down to eat compels you to recognize others’ humanity and how you may be more similar than different. Simply said, breaking bread with someone is one way of being more open to differing opinions… and that is a necessity for great investing! Welcoming and Understanding Different Views Lead to Better Investing Bill Miller is one of the greatest investors for the past 25 years. His 15 years of straight market-beating performance is remarkable! At one time, Professor Litman asked Miller to explain how he beats the market. His first rule of great investing? Understand what the market is thinking—meaning, understand what’s embedded in the price! According to Miller, failure to do this first step is the core of poor performances of some money managers and investors. Given that there are myriads of opinions that generate the market’s final equilibrium price, it’s important that investors know how to humbly listen to all sides of an argument. Without this, Miller says one would fail to truly understand what the market is embedding in its stock prices and why you can be a contrarian investor. … and without listening to those who disagree with you, you could miss out on lots of great opportunities because you’re caught up only thinking about your own opinion and viewpoint. For example: In January 2021, a short squeeze of the stock of video game retailer GameStop (GME) and other securities took place, causing major financial consequences for certain hedge funds and large losses for short sellers. [Short Squeeze: A rapid increase in the price of a stock due to an excess of short selling. This occurs when a stock moves higher and short sellers decide to cover their positions or are forced to do so via margin calls.] Approximately 140% of GME’s public float had been sold short. At its peak, the short squeeze caused the retailer’s stock price to reach a pre-market value of over USD 500 per share. [Public Float: Also known as “free float,” this represents the portion of a corporation’s shares that are in the hands of public investors as opposed to locked-in shares held by promoters, company officers, controlling-interest investors, or governments. [Pre-market Trading: This refers to stock trading that happens before the actual trading day of a stock exchange.] While some purists in the investment world insisted that GME belonged at something below USD 20, their argument was based on very similar theses. So, to analyze this case further, Professor Litman and his team investigated some of the bull cases for the company. Their goal was to go beyond explaining GME’s stock price increase as simply a short squeeze trade. They felt many of the theories about the video game retailer had foundations. Here’s what they found out after investigating: While GME retreated in price, it’s still nowhere near the USD 8 price point that many investors called out. The company’s stock remains around USD 100 per share a year after the short squeeze. What Professor Litman and his team did shows what it’s like to be a contrarian investor while also listening to others’ opinions. Instead of easily believing what majority of the investors are saying, they also did their own research before making a conclusion and a decision. — According to Professor Litman, to be a great investor and beat the markets, you need to have a contrarian viewpoint. … and similar to breaking bread with someone regardless of your differences, succeeding in your investment strategies means welcoming new data points, varying theories, and differing opinions. Besides, you have to keep in mind that in investing, people have relatively different viewpoints on what fair value is for any stock. There are generally strong opinions behind someone who’s willing to buy a company’s share for USD 20 and another person who refuses to sell below USD 21. So, be more open to others’ viewpoints! As Professor Litman said: “The quoted price of any given company is just the equilibrium of a vast array of options on what a company is worth.” Hope you’ve found this week’s insights interesting and helpful. Follow us on LinkedIn. Stay tuned for next Wednesday’s The Independent Investor! In one of the coaching comments Professor Joel Litman delivered to his employees at Valens Research, he talked about buying a “Bobo The Clown” doll for his youngest son. Learn more about the importance of self-efficacy in investing in next week’s article! |
