I have a little kid. He is eighteen months old and as cute as any kid can be.
His favourite song/video is this one called Five Little Monkeys. He goes ballistic when the song plays (more often he goes ballistic when we refuse to play the songs for him).
And every time Five Little Monkeys comes on at home, I am keenly reminded of an experiment.
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In a cage there is a banana hanging on the roof and a ladder leading up to the banana. Five little monkeys were introduced to the cage. In no time the monkeys would noticed the banana, and the nearest and fastest would have started clambering up the stairs to reach for it.
Just as the Little Monkey is about to get to the banana, all the Little Monkeys in the cage are sprayed with cold water. They become cold and wet. Needless to say, they are not happy Little Monkeys.
The scenario is repeated for as many times as it takes for the Little Monkeys to reject the banana, leaving it untouched while they go about their Little Monkey business. By now they would learnt that any attempt to reach for the banana will leave them cold and wet. They are better off leaving the banana alone.
And here is where things get a little interesting.
Instead of the original five Little Monkeys, Little Monkey #1 is replaced by a new Little Monkey who has never been in the cage before and hence unaware of the ‘rituals’ of this particular cage. Let’s call him Little Monkey #6.
Being the little monkey he is, #6 made a beeline for the banana the moment he laid eyes on it. The other Little Monkeys watched in horror and fearing the familiar spraying again, made a beeline for him. They pulled at his tail grabbed at his hair and yanked at his leg, all in an attempt to prevent him from getting to the banana.
Now Little Monkey #6 was shocked to say the least. He was puzzled but not ready to give up just yet. He tried again, and the same thing happened, the other Little Monkeys were onto him in no time.
After a couple more attempts, he too has learnt to leave the banana alone. This was despite him having never experienced a spraying.
In no time, yet another Little Monkey gets replaced and the exact same scenario plays out. Little Monkey #7 gets walloped whenever he tries to go near the banana. And the same goes for Little Monkey #8 and Little Monkey #9 and Little Monkey #10.
Eventually, every Little Monkey in the cage is a new immigrant. None of them would have experienced the water treatment. None of the Little Monkeys would have known what is the reason for stopping so violently his fellow Little Monkeys from getting to the banana, except that it had to be done.
The banana remains tied to the ceiling untouched while the five Little Monkeys go about their Little Monkey business just a few steps away.
In our daily life, this phenomenon is particular widespread. We engage in many forms of behaviour without knowing the real reason. I am sure you would have encountered many instances of this at work whereby processes may not be the most efficient but they remain because ‘it has been like this for as long as we know it’.
When it comes to Investing, everyone is investing via an Earnings based model of analysis. Stocks are bought and sold based on the fluctuations of their earnings. Do you know why this is so? Have you ever questioned it? Is the model still valid? Is there a better way of doing things?
It is always easiest to do what the crowd does. After all if you are the Little Monkey in the cage and you try to reach out for the banana, you would be pulled at grabbed at and yanked at in no time. It is hardly encouraging. But questioning status quo and going against the crowd often brings the best rewards. After all, in Investing, what is comfortable is rarely profitable.
I cannot wait to teach my little kid about that.
Ps. Very soon we will be sharing our CNAV strategy with all our BigFatPurse readers. It is a whole new Stock Picking Strategy aimed at filtering out the most undervalued stocks in the market right now. The methodology is objective and the principles behind it simple and sound. It will force you to challenge your assumptions and see investing in a whole new light.
We are very excited about it right now. You will be too when you hear about it. Do watch this space!