The successful investor Joel Greenblatt once told a story about when he was asked to teach a 9th grade class about the basics of investing and how the stock market works. He had shortly before tried to teach the same to a group of surgeons. When the men’s questions after the presentation were in the lines of “The stock market was up 2 % yesterday – what do I do about that? And, “Oil is down $2 – what should I do?”, he figured he had failed his presentation to the intellectuals.
He then thought about what he could do to not crash and burn in the presentation for the kids, so he walked in to the class the first day, and he handed out a bunch of cards. He also brought a big jar of jelly beans, and he handed around the jar, told the kids to try to count the jelly beans, and figure out how many they thought were in the jar, and then write their estimate on their own card one by one.
It turned out that the average guess that the kids wrote down on their cards was 1771 jelly beans. There were 1776 in the jar, so that was a pretty good average estimate.
Before he told them their average estimate, he went around the room, one by one, and asked them to tell out to the class what their guess was. The guess when he went around the room was 850 jelly beans on average.
He explained to the class that the second guess was the stock market.
Everyone knows what they just read in the paper, what the guy next to them said, what they saw in the news, and they are influenced by everything around them – and that’s how the stock market works!
The cold calculating guess, when they were counting rows and trying to figure out what was going on, that was the better guess. That’s not the stock market, but that’s where Joel sees the opportunity that the stock analyst has to do well in the stock market if he does good valuation work.