Sunday, September 10, 2017

Two Faces Perception of Masks

Variant Perception is a concept defined by Michael Steinhardt as a view that is materially different from the consensus and that you have a belief that it has an average probability of being correct.

For many, the fear of standing out negatively overrides their desire to stand out positively. By following the herd mentality, you are cushioned by the many views that are supporting the reasons for the fact that makes you comfortable. The problem is usually the case where valuation gets higher and as investors you are paying that comfortability for a premium with lesser margin of safety.

On the other hand, being a contrarian is lonely because you are going against the crowd for most of the time. They are usually slow, infrequent in nature and are an outcast by most standard which most people don’t quite understand at the beginning. You’ll get plenty of questions which will make you rethink on your thesis and on the extreme you may begin to doubt yourself if that strategy even works after all.

Variant Perception can be a very useful strategy because it identifies a lot of value opportunity which was shunned by the general public masses and that is usually where the greatest distortion between value and fair price lies in between. That does not mean you will not make any losses in the interim, you will still do, but the aversion is far greater when most of the things have been priced in.

We always hear the famous quote of our favorite investor, Warren Buffett saying this:

“The first rule of investing is Don’t lose money”

“The second rule is Never forget the first rule”

This does not mean that investors should never incur the risk of any loss at all and completely avoid any investment. What this really mean is that over several years of investment, your portfolio should not be exposed to appreciable loss of principal which is defined by a permanent loss of capital.

Take an example where you are being assured that the probability of an event happening is 51% as opposed to losing at 49%. If this statistics hold true, then it will make sense to go for the win with the higher probability. That doesn't mean you will not make losses, you can still do as the probability of losing is still there, it is just that probability is lower. The problem is if this statistic thesis does not hold true 100% percent of the time, which almost always happen to an investor who are subject to various market and perception forces.

The other thing that is exciting about this Variant Perception is being a contrarian it is never wrong to change your mind if the thesis has changed. I think there are plenty of people who shy away from openly admitting their decisions are wrong and failed to take action from it. The funny thing about this is you can be wrong but taking the required action to make it right and you can be right but taking the wrong perception to think you are right when you could be wrong. Sounds complicated right?

What this means in simplistic manner is that if you are wrong, hands up and admit them and then learn from the mistakes as this will be better in the long run than hiding in the shell and think it is alright.

The greatest investor of all time, Buffett doesn't make losses? No la, he still did, he just learned from his mistakes a lot better than us.

Thanks for reading.

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