The best lessons tend to be the simplest.
That’s certainly true for investment lessons. And by that measure, Joel Greenblatt put on a masterclass several years ago when he spoke to a group of his peers.
Greenblatt runs an investment firm in New York City, teaches at Columbia University Business School, and has written several books about investing. In his speech, he recounted a story that provides an insightful investing lesson.
Greenblatt said that he was asked to teach a ninth grade class about investing over a series of weeks. He wanted to start with a bang, so he devised a fascinating experiment for the first class.
He walked into the classroom holding a large glass jar filled with jelly beans. He asked the ninth graders to pass the jar around the room, encouraging the students to use any technique of their choosing to estimate the number of jelly beans in the jar. They could make a wild guess, count the rows and the height to arrive at an approximation, or any other approach to form their guesses. The only thing they could not do was open the jar.
Greenblatt also passed out three-by-five index cards.
After each student had a chance to evaluate the jar, Greenblatt asked them to write down their estimate for the number of jelly beans in the jar. The students then handed their index cards to him. Greenblatt used the index cards to form a collective average of the ninth grade class.
Before disclosing the average guess, Greenblatt took the experiment one step further. He went around the room and asked each student to tell him how many jelly beans, in their estimation, were in the jar. He told the students they could keep their original guess that they wrote on their index card, or they could change their guess. It was completely up to them.
One by one, the students offered a number to Greenblatt, which he dutifully wrote down. He then computed an average for the verbal responses of the ninth graders.
The results were incredible.
Greenblatt disclosed to the class that the jar contained 1,776 jelly beans. The average from the index cards was 1,771. So the ninth graders, collectively, nearly nailed the exact number of jelly beans in the jar.
Greenblatt then unveiled the results of the verbal responses. And that’s where things got really interesting. After tallying the numbers, he found that the verbal average was 850, a wide margin from the actual number of jelly beans in the jar.
The students’ verbal guesses, according to Greenblatt, represent what happens in the stock market. As he told his peers, “Everyone knows what they just heard, what they just watched, what they just read, who they just talked to. [Investors] are influenced by everything around them.”
That influence is actually a hindrance rather than a help.
By contrast, when the students were “cold and calculating,” writing their answers on index cards, they were thinking independently. That approach, it turns out, usually gets closer to the truth – whether that truth is as inconsequential as arriving at the number of jelly beans in a jar or as important as estimating the value of a business or the stock market.
As investors, we tend to listen to our peers, the media, and talking heads. We’re social beings and are easily influenced by what we see, hear, and read. That’s why more and more investors run for the exits as the stock market falls further and further in value, even though a rational investor would do exactly the opposite.
As Greenblatt’s ninth graders proved, investors are better off when they think for themselves.