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Rethink Groupthink: Sheep Get Slaughtered

NEW YORK ( TheStreet) -- When push comes to shove, the vast majority of investors -- professional and otherwise -- tend to stick with the herd. As a result, statistics show that the long-term performance of most investors tends to be mediocre at best.

Truly independent thinking is a rare commodity on Wall Street and everywhere else. What's more, the explosion of 24-7 media consumption threatens to fuel more groupthink, which can have disastrous results.

In contrast, consider the actions of business mogul John Malone and his team at Liberty Media (LMCA), which launched a surprise effort to buy Barnes & Noble's (BKS) about a year ago, when the company was being dismissed by many as road kill on the digital media highway. Liberty wound up with preferred stock that's convertible into common shares worth a 16.6% stake in Barnes & Noble.

Now consider this week's news that Barnes & Noble's Nook e-reader business will receive hundreds of millions of investment dollars from tech giant Microsoft (MSFT). This gave new credibility to an effort by the venerable bookstore chain to reinvent itself for the digital age. For investors paying close attention, the news also bolstered the reputation of Malone.

Malone's investment looks prescient now after shares of Barnes & Noble soared by more than 52% on Monday on news that Microsoft is buying in to gain a foothold in the market for e-reader tablet devices. But like many great investments, Liberty's pursuit of Barnes & Noble looked like pure insanity at the time.

Books, for obvious reasons, were one of the first products to be widely purchased on the Web at Amazon (AMZN) and other sites, and the drumbeat of dire headlines coming out of the bookstore business has long sounded like a death march. Barnes & Noble's chief rival, The Borders Group, filed for bankruptcy months before Liberty made its move, and most people thought Barnes & Noble was next.

The Nook, meanwhile, looked like a feeble attempt by the brick-and-mortar chain to keep its hat in the ring with Amazon's Kindle and Apple's (AAPL) iPad as those products took off and e-reading went mainstream.

Liberty's investment in Barnes & Noble flew in the face of conventional wisdom, and for that reason, it's an example of the most admirable quality of the truly great investor: the ability to exercise independent command of the facts and invest money in a thesis that runs counter to the prevailing views of the masses.

Human beings are social animals. We find comfort in being part of a group, and we're especially prone to seeking comfort above all else when it comes to our money.

Unfortunately, investments that are widely embraced by the herd tend to be priced expensively, because everyone wants a piece of the action. The cheapest investments are those that are shunned by the herd, and let's not forget that the whole point of investing in securities is to buy them at a low price and sell them at a higher price.

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