How do first principles help avoid herd mentality in capital markets?

Simply put, herd mentality is about "following the crowd." You see others queuing up to buy something, and you join the queue, regardless of whether you actually need it, always thinking that if so many people are buying it, it must be right. In the stock market, it means seeing a stock surge, a crowd rushing in, and you rush in too, afraid of missing out; or seeing everyone selling, and you quickly sell too, afraid of being stuck with losses. Behind this is actually emotions (greed and fear) at play, rather than rational judgment.

So, what are first principles for? They tell you not to "follow the crowd," but to figure out for yourself "what something is truly worth."

For example, you see a long queue outside a popular internet-famous restaurant (herd mentality). With a "following the crowd" mindset, you'd think: "Wow, so many people, it must be delicious, I'll queue too!" But if you apply first principles, you'd first ignore the queue, and then ask yourself a few fundamental questions:

What kind of cuisine does this restaurant serve? (What are the company's products/services?)
Do I like this type of cuisine? Are the ingredients fresh? (Does this product have a market? Is the quality good?)
What's the price? Do I think it's worth spending this money on this meal? (What is the company's valuation? Is the current stock price expensive or cheap?)
Who is the chef? What's their reputation like? (Is the company's management team reliable? Does it have core competitiveness?)

Only by understanding these fundamental questions can you independently judge whether this restaurant is worth queuing for.

Returning to the capital market, first principles guide you back to the essence of business, treating a listed company as a business. You're not buying a string of code or a fluctuating price; you're buying a partial ownership of this company.

So, when everyone in the market is frantically snatching up a certain stock (herd mentality), you'll calm down, disregarding how lively the stock price is, and instead research:

What does this company do? Where is its moat?
Is it profitable? What's its earning capability like? (Check its financial reports)
Does its industry have a future?
Is the current price, relative to its future earning potential, too expensive or very cheap?

Once you've thoroughly researched these fundamental questions, you'll have a clear measure in your mind.

If, after your research, you find the company is just an empty shell, purely speculative, then no matter how lively the market is or how high it rises, you won't be tempted, because you know it's a bubble, and getting in means becoming the "last buyer" (holding the bag). This successfully helps you avoid the frenzy of the herd.

Conversely, if you find a company is excellent but is neglected by the market due to some short-term reasons, and everyone is selling (which is also a form of herd mentality). But your research tells you that its intrinsic value is far higher than its current stock price, you'll have the confidence to buy when others are fearful.

In essence, first principles give you a pair of "X-ray glasses," allowing you to see through the market's superficial excitement and panic, to perceive a company's true framework (intrinsic value). With this, you won't be easily swayed by the surrounding herd, because your decisions are based on facts and logic, not on others' emotions.