What’s in a Herd?

I want to take a moment top talk about something I love most about markets. Trends.

The momentum oriented speculators are driven by concepts that span from psychology, to the market manias of the 1700s, to maths, social science and then back again.

One of the things that stand out most is how, regardless of what makes the most sense, the crowd always seems to herd together as one. It’s only after few have slowly ventured toward their good judgments does this sociological-wonder jolt back to reality.

Today, if we were to start from ground zero, there wouldn’t be anything that would pull me in one particular direction. It would be most reasonable for me to wait and see what the crowd does and then run with it.

But this is not the case. The situation is grim and contrary to what many wish to believe it is getting worse by the day with losses mounting, earnings falling, valuations still excessive and Fear is out of town. Yet, only slowly are speculators coming to their senses.

Additionally, these same traders may end up being bogged down financially. During the Great Depression, everyone knew that it was the greatest time to buy shares. But no one was able to afford anything, as wages and jobs were cut heavily, and the little savings people had were used to feed their families.

Fantasy Trading
Imagine that you knew tomorrow morning was a One-day Sale. Everything you ever wanted would be selling at half price. Thereafter, reverting to normal prices, maybe even higher (I guess to make up for lost profits). Most people would run to the Malls and stock up!

This (although in reverse) is what I believe we are currently experiencing on Wall Street. People couldn’t believe that the Financials could fall as far and fast as they did. They expected a rally – and got it! They knew it would probably be temporary and that they should use the opportunity to stock up (on short positions that is).

But something odd has happened. These same analysts who were bearish just 2 weeks ago have jumped onto another wagon completely. “The Bear market is over! Buy Financials! Commodities will fall, and oil will be back at 70 before you know it! Buy like its 1990!”

But these people are mad. They refuse to understand that they are the ones who will sell themselves out.

Trivia Question: When did investors start talking about buying Gold? The answer is sometime around 1997-98. When did investors actually start buying Gold? Sometime after 2001.

Try this one: When did people first call Housing a Bubble? 2005. When did housing prices actually begin falling? 2007.

What we see here is what we call in Behavioral Economics: “herding”. People, speculators, believe things that make little sense simply because everyone is not sure that everyone else can be so stupid.

“If that lane is really empty, why haven’t cars changed lanes yet?” (of course, no sooner does the driver finish thinking when 15 cars suddenly pile in).

People need reasons other than what makes sense. They need to know if someone else is doing it, or why this hasn’t been tried before.

Investors (and there aren’t many) understand that the daily charts are just a facade and what really matters is the big picture. (The real long run).

Short point for all ye long-term investors:
The truth is that no asset class has ever significantly outperformed any other. What stocks gain in short-term gains, they forfeit in case of corporate insolvency, and while bond holders often end up with more capital from such an event, commodities or housing prices that may have caused this event may gain immensely.

More Trivia:
What was the overall return for the Dow Jones Industrial Average (including dividends) between 1982 and 2000? 1,400%. What was the overall return from Gold between 1973 and 1982? 1,400%!

Now tell me that stocks outperform all assets over the long run! It all depends where you start from.

The other day we took apart each asset class and analyzed what each respective prospects were. Needless to say, in today’s day and age, with inflation (real assets), deflation (fiscal assets) and stagflation (consumers tapped-out), it pays to be in Commodities, particularly, gold and silver!

I don’t love gold, but I own it today. I may love stocks, but I’ll buy them tomorrow!


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