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"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."
Mark Twain had a way with words.
Though, ironically – or just appropriately – it probably wasn't Twain who said it, despite the people who 'know for sure' that he said it.
Regardless of its origins, the phrase has a lot to tell us, in general and particularly as investors.
See 'common knowledge' and 'accepted wisdom' are really valuable, when they help us compress our learning time and help us leverage what other people have already learned.
We don't need to, for example, re-invent the idea (or re-create the equations) of 'discounted cash flow' to understand and use it.
We don't have to come up with a way to compare a company's market value with its ability to create value for shareholders – we already have the price/earnings ratio (and other, similar, metrics) to do that for us.
As I've observed before (repeating the observation of others), if we had to make all of our life decisions anew, from first principles, each morning, it'd be midnight before we made it to the kitchen.
So I'm absolutely not suggesting we throw out everything we know, or everything we've learned from others.
But I am suggesting that we should be careful to reconsider what we think we know, from time to time.
Or, as musician and comedian Tim Minchin says (and this one is definitely attributed correctly):
"We must think critically, and not just about the ideas of others. Be hard on your beliefs. Take them out onto the verandah and beat them with a cricket bat…. Be intellectually rigorous…"
And you don't have to go too far in investing circles to find 'accepted wisdom' that, well, turned out not to be too wise.
Older investors will remember 1999, when the focus was not on profits, or even on revenue, but on 'eyeballs' – the belief that winning the race to accumulate users was all that counted. It was important, for sure, but not worth a zac if you ran out of money before you managed to turn those eyeballs into cash flows and earnings.
'Everyone knew' it was about eyeballs. Until it wasn't.
More recently?
I'd suggest the slavish love of bank shares by many might fall into that category. The businesses – incredibly successful and hugely value-creating in past decades – haven't been that way for almost a decade, now.
I suspect for many of you that might be a surprise. But let me try these numbers on you.
Over the last decade, the S&P/ASX 200 Index (ASX: XJO) has gained 153%, including dividends, according to S&P Capital IQ.
In comparison, Commonwealth Bank of Australia (ASX: CBA) has gained 121%. And that's the best of the group.
Rounding out the list, CapIQ tells me that National Australia Bank Ltd (ASX: NAB) is up 27%, ANZ Group Holdings Ltd (ASX: ANZ) has gained 21%, and Westpac Banking Corp (ASX: WBC) is up 20%.
Over 10 years.
But doesn't 'everyone know' that the banks are great investments?
Now, I know that criticising bank returns is a great way to get hate mail, and let me be clear: they have been great investments over the previous few decades. And I'm not criticising bank shareholders for owning them – they may be happy to avoid capital gains tax and just collect the dividends.
But, at least in recent history, that data suggests that it's worth disregarding – or at least, adjusting – what 'everyone knows'.
Of course, it's easy to do in hindsight. It's a far, far harder thing to do, looking forward.
But it's something we must at least attempt. After all, as Warren Buffett said:
"If past history was all there was to the game, the richest people would be librarians."
What does 'everyone' know today?
Plenty. Most of it might even be true.
But some of it won't.
Moreover, here's the thing: the stuff 'everyone knows' is probably already priced accordingly.
So even if they're right, and we're right along with them, we might just end up with average returns anyway.
The job of the investor, then, is not to be 'contrarian' for the sake of it, but rather to evaluate opportunities from first principles, and then (and only then, unless you're dollar cost averaging into a low-cost index ETF), buy or sell when your estimate of value is meaningfully different – after allowing for the necessary imprecision of those valuation estimates – from the market.
If that sounds too hard, there's absolutely nothing wrong (and a lot right!) with simply investing in the abovementioned low-cost, index-based ETFs.
But the spoils of outperformance go to the investor who puts in the work and finds opportunities to be right where others are wrong.
And that starts with putting both what 'we know for sure' and the accepted wisdom to one side, and thinking, clearly, for ourselves.
Fool on!
