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Can One And One Make Three?

I had one of those comical, double-take moments the other day – the kind that you might chuckle at, if you saw it on an old Warner Brothers cartoon show.

We’ve seen it many times before: Elmer J Fudd, with musket at the ready, walks past Bugs Bunny dressed up as a baby in a pram, before doing a double-take to confirm that it really wasn’t the pesky wabbit in the stroller.

But this was no chuckling matter.

Recently, I was browsing the bargains on offer at a well-known chemist in one of Singapore’s popular shopping malls – the one with the beautiful red-brick facade. I glanced, fleetingly, at a poster, looked away and then looked back again to make sure that I wasn’t seeing things.

Savings galore

I definitely wasn’t imagining it. It was as clear as Guardian belongs to Dairy Farm International (SGX: D01). The poster definitely said: “Current price $95.00; Previous price $107.70; Save $75.70.

How on earth does $95 subtracted from $107.70 equal $75.70?

I asked an assistant for clarification, who then asked another assistant, who subsequently whipped out a calculator and tried to, somehow, prove to me that one plus one equals three.

I was not going to be put off, though.

I stood my ground, literally. I refused to budge, before a manager appeared from a back office to say – without even a word of apology – that there must have been a misprint.

Mistakes happen

We all make mistakes. But a few things crossed my mind as I stood and looked at the poster.

  • How many people, I wondered, saw the poster that day, without questioning the validity of the offer?
  • How many people saw the poster and thought that the sums didn’t quite add up, but still accepted that it must be correct?
  • How many knew that the poster was wrong, but were too embarrassed to speak up?
  • How many people, I thought to myself, are simply unwilling to rock the boat?

Similar things happen in the investing world.

We might for instance, look at the valuation of a company. We know that it is overvalued. But we still try to convince ourselves that it must be alright, even though it is blatantly wrong.

The Emperor’s New Clothes

Sometimes, we might look quizzically at a set of numbers in a company’s accounts. But we are too embarrassed to question the validity of the figures. It is what I call the “Emperor’s New Clothes” syndrome. After all, the weight of opinion of the masses must mean that we are wrong and they must be right, right?

How often are we too uncomfortable to question the recommendation of sell-side analysts? Their main objective is simple. It is to encourage us, private investors, to regularly churn our portfolios, by issuing plausible reports that persuade us trade shares on a whim.

Sell-side analysts are very good at what they do. They play to the short-term fears of some and pander to the even shorter-term greed of others, who hang onto their every word for investing tips.

Just look at how they stirred up market reaction over US interest rates. Ahead of the October interest-rate meeting, the Straits Times Index (SGX: ^STI) jumped from 2,800 points to almost 3,100 points before settling at 2,850 points after the history-making December meeting.

Think for yourself

I recently came across a Real Estate Investment Trust that was upgraded by brokers in November, following a downgrade only in October. So, within the space of one calendar month the stock had gone from a “buy” to a “hold” and back to a “buy” again.

What is even more remarkable is that the new “target price” of the stock is higher than the price that the stock was trading at, when it was downgraded. Figure that one out, if you can.

Warren Buffett once said: “You have to think for yourself. It always amazes me how high IQ people mindlessly imitate. I never get good ideas talking to other people.”

The same goes for everything we see and hear around us, especially offers at chemists. We have to think for ourselves.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.