Contrary Thinking, Prevailing Thought And The Crowd
If you've read my blog for long, you probably know I tend to take a contrary view of many topics. I believe contrary thought is key to much of life's success for many. That includes investing. Warren Buffet, Ben Graham and George Soros are examples of contrary investors. That doesn't mean you have to always be on the other side of a debate or on the other side of an investment but you should be on the lookout for overly compelling arguments. If it sounds too good to be true, it typically is. Much of my thought processes are based on the prevailing view of a particular topic and comparing that to historical outcomes or anticipated psychological responses. Obviously, this is how many try to use sentiment to their advantage on Wall Street. But, there seems to be a tendency to out-sentiment the sentiment these days. It can be confusing at times.
Let's develop this as it pertains to investing. If you are looking for Wall Street to tell you the future of equity markets, I wouldn't hold my breath. People paraded onto TV are typically reactionaries not the visionaries. The Wall Street visionaries let their actions speak for them and most have no desire to inform their competition of what they are doing. It is no different than HP and Dell competing in the market place. Is Dell about to tell HP what it's product or marketing plans are? As unthinkable as it sounds, Wall Street's smart money has a vested interest in keeping the average investor duped. Paul Farrell, a former Wall Streeter himself, has written about this extensively. As I write this, we are in pre-market activity awaiting the Fed's 2:15 statement on rates. Most of the time, pre-market activity will determine which direction the market will move at 2:15. Yet at 2:00, the TV analysts will line up to anticipate what the Fed will say and by implication what the markets will do. Recently the market has rocketed higher before anyone has any time to dissect the results. In other words, right at 2:15 before anyone has opportunity to read the minutes. But, Wall Street wants you to believe it was the Fed statement that drove the market and that is what you read in the following day's newspaper. "Market Explodes With Fed Decision". When I posted that I was dubious as to the carry trade causing a sell off, it was because I've looked at the dynamics of the yen, the futures market positions and the historical correlation to said market moves with similar positions by professionals. There were many past time when the markets should have shown significant volatility as a comparative to recent events and they didn't. Therefore, other macro events are likely at work. Yet, again, the set of events unfolds where someone prints a story about the equity sell off being the Yen carry trade. Remember, markets are the great deceiver. Just as in any free market, there are winners and losers. Investing for crumbs is what the uninformed do. Making a living as a speculator is what professionals do. And, it is in their best interest to keep the uninformed well...uninformed. Why is it any different than two titans like GE and Toshiba competing to win a nuclear power plant project? It's not. Back to the Yen Carry Trade. Maybe the first story is accurate. But, what if it isn't? Before you know it, without hesitating, nearly every commentator on financial markets are printing stories about the carry trade. What is it? What does it mean? What happens if it unwinds? Who actually validates it to be true? Did any of the reporters or bloggers or otherwise ever take the time to validate it? I doubt it. It was all based on that first report. So, all of this hand wringing by thousands and thousands of bloggers and journalists is probably based on the first story. Was it accurate? Why would journalists and bloggers believe it? Because we are conditioned to believe it. Now, this may sound conspiratorial but it's not. I don't believe in conspiracy theories as I've written. But, psychologists and sociologists readily acknowledge the concept of social conditioning. The "American Dream", as an example, is social conditioning. I'm not saying it is bad just that it is so. I aspire to achieve some form of the American Dream. Is it so bad to want to own a house, have enough money to live a reasonable life, have civil liberties and enjoy your new car. That dream was much different one hundred years ago but it was still there.
I highly recommend a book I've referenced before on here. It is the brilliant little book from written over one hundred years ago. It is Gustave Le Bon's "The Crowd". You can pick it up on Amazon for less than $10. The concept of crowds and contrary thinking go hand in hand. Likely every major advance made by humanity was made by individuals or small groups of people. It's no coincidence greatness does not come from large groups of people. The point? As time consuming as it is, one should learn to nurture original thought processes. Or, as ancient Asian thinkers wrote, learn to unlearn everything you believe to be true. Now, I'm not advocating everyone erase all of their beliefs but maybe the next time someone tells you something and there is no conclusive evidence, consider a contrary opinion. If someone tells you they weigh 150 pounds, that is likely not worthy of contrary thought. But, when the Treasury Secretary tells you he believes the housing market has bottomed and his position is a political appointee, you might question his motives such as winning the next election or maintaining an orderly flow of capital markets or not inducing panic in the general population.
I'll finish with a quote from Le Bon that I have posted on here before. “In it’s ordinary sense the word ‘crowd’ means a gathering of individuals. From the psychological point of view the expression ‘crowd’ assumes quite a different signification. The sentiments and ideas of all the persons in the gathering take one and the same direction, and their conscious personality vanishes. A collective mind is formed, doubtless transitory, but presenting very clearly defined characteristics. It forms a single being. The most striking peculiarity presented by a psychological crowd is the following: Whoever be the individuals that compose it, however like or unlike be their mode of life, their occupations, their character, or their intelligence, the fact that they have been transformed into a crowd puts them in possession of a sort of collective mind which makes them feel, think, and act in a manner quite different from that in which each individual of them would feel, think and act were he in a state of isolation. This very fact that crowds possess in common ordinary qualities explains why they can never accomplish acts demanding a high degree of intelligence. In crowds it is stupidity and not mother-wit that is accumulated.”
Let's develop this as it pertains to investing. If you are looking for Wall Street to tell you the future of equity markets, I wouldn't hold my breath. People paraded onto TV are typically reactionaries not the visionaries. The Wall Street visionaries let their actions speak for them and most have no desire to inform their competition of what they are doing. It is no different than HP and Dell competing in the market place. Is Dell about to tell HP what it's product or marketing plans are? As unthinkable as it sounds, Wall Street's smart money has a vested interest in keeping the average investor duped. Paul Farrell, a former Wall Streeter himself, has written about this extensively. As I write this, we are in pre-market activity awaiting the Fed's 2:15 statement on rates. Most of the time, pre-market activity will determine which direction the market will move at 2:15. Yet at 2:00, the TV analysts will line up to anticipate what the Fed will say and by implication what the markets will do. Recently the market has rocketed higher before anyone has any time to dissect the results. In other words, right at 2:15 before anyone has opportunity to read the minutes. But, Wall Street wants you to believe it was the Fed statement that drove the market and that is what you read in the following day's newspaper. "Market Explodes With Fed Decision". When I posted that I was dubious as to the carry trade causing a sell off, it was because I've looked at the dynamics of the yen, the futures market positions and the historical correlation to said market moves with similar positions by professionals. There were many past time when the markets should have shown significant volatility as a comparative to recent events and they didn't. Therefore, other macro events are likely at work. Yet, again, the set of events unfolds where someone prints a story about the equity sell off being the Yen carry trade. Remember, markets are the great deceiver. Just as in any free market, there are winners and losers. Investing for crumbs is what the uninformed do. Making a living as a speculator is what professionals do. And, it is in their best interest to keep the uninformed well...uninformed. Why is it any different than two titans like GE and Toshiba competing to win a nuclear power plant project? It's not. Back to the Yen Carry Trade. Maybe the first story is accurate. But, what if it isn't? Before you know it, without hesitating, nearly every commentator on financial markets are printing stories about the carry trade. What is it? What does it mean? What happens if it unwinds? Who actually validates it to be true? Did any of the reporters or bloggers or otherwise ever take the time to validate it? I doubt it. It was all based on that first report. So, all of this hand wringing by thousands and thousands of bloggers and journalists is probably based on the first story. Was it accurate? Why would journalists and bloggers believe it? Because we are conditioned to believe it. Now, this may sound conspiratorial but it's not. I don't believe in conspiracy theories as I've written. But, psychologists and sociologists readily acknowledge the concept of social conditioning. The "American Dream", as an example, is social conditioning. I'm not saying it is bad just that it is so. I aspire to achieve some form of the American Dream. Is it so bad to want to own a house, have enough money to live a reasonable life, have civil liberties and enjoy your new car. That dream was much different one hundred years ago but it was still there.
I highly recommend a book I've referenced before on here. It is the brilliant little book from written over one hundred years ago. It is Gustave Le Bon's "The Crowd". You can pick it up on Amazon for less than $10. The concept of crowds and contrary thinking go hand in hand. Likely every major advance made by humanity was made by individuals or small groups of people. It's no coincidence greatness does not come from large groups of people. The point? As time consuming as it is, one should learn to nurture original thought processes. Or, as ancient Asian thinkers wrote, learn to unlearn everything you believe to be true. Now, I'm not advocating everyone erase all of their beliefs but maybe the next time someone tells you something and there is no conclusive evidence, consider a contrary opinion. If someone tells you they weigh 150 pounds, that is likely not worthy of contrary thought. But, when the Treasury Secretary tells you he believes the housing market has bottomed and his position is a political appointee, you might question his motives such as winning the next election or maintaining an orderly flow of capital markets or not inducing panic in the general population.
I'll finish with a quote from Le Bon that I have posted on here before. “In it’s ordinary sense the word ‘crowd’ means a gathering of individuals. From the psychological point of view the expression ‘crowd’ assumes quite a different signification. The sentiments and ideas of all the persons in the gathering take one and the same direction, and their conscious personality vanishes. A collective mind is formed, doubtless transitory, but presenting very clearly defined characteristics. It forms a single being. The most striking peculiarity presented by a psychological crowd is the following: Whoever be the individuals that compose it, however like or unlike be their mode of life, their occupations, their character, or their intelligence, the fact that they have been transformed into a crowd puts them in possession of a sort of collective mind which makes them feel, think, and act in a manner quite different from that in which each individual of them would feel, think and act were he in a state of isolation. This very fact that crowds possess in common ordinary qualities explains why they can never accomplish acts demanding a high degree of intelligence. In crowds it is stupidity and not mother-wit that is accumulated.”
<< Home