Beat the Crowd

By Ramesh Akkineni

Jim Rogers writes about crowds and their effects.

It's human nature to feel more optimistic when everyone else is feeling bubbly, too. It's also a good way to lose your shirt.

Wall Street is and always has been an outsize exhibition of society, a reflection of the hopes, dreams, fears, and worries that drive us all. Stock prices rise amid optimism and fall amid pessimism, whether the mood is justified or not. To learn the ways of the market is to learn about human nature.

As we view the world through our rational and emotional lenses, we form opinions about our current situation and the prospects for the future. We are vulnerable to error if the input we receive is misleading or if we interpret it incorrectly. If we are exposed only to gloom, we're likely to become gloomy. If a piece of information connects with one of our stronger emotions--our fear, say, or our greed--we may distort its true meaning.

These sorts of errors can be shared (as well as amplified) by crowds. As early as the late-19th century, a French sociologist named Gustave LeBon was one of the first to write extensively about the behavior of crowds. Others, relying on his ideas as applied to the world of finance, noticed that, even when investors are unknown to one another and separated by vast distances, they are linked by the prices of the investments they hold in common. Thus, when the price of a security rises, it transmits positive signals to all members of the group, leading to collective cheer. When the price falls, it creates collective despair.

Today, of course, investors are connected through a vast array of airwaves, cables, and telephone lines. They are bombarded by a wide assortment of information potentially relevant to their investment decisions. Even so, LeBon's notion still applies. We may have more information these days, but the percentage of people with good judgment is no higher than in LeBon's time.

It's my opinion that investors become most vulnerable to the crowd when they act passively--or, worse, when they actually seek "safety" in the herd. Merely taking in the news that comes your way virtually assures that everything you hear will be, in one way or another, a product of the collective buzz. And buzz is what you'll base your decisions on-- with the further potential of compounding this error with flawed analysis. Seeking a broker's counsel is no escape: Most of them deliberately move with the crowd as a way of protecting their careers. Like fish, they know life is less hazardous swimming with the school.

I also don't recommend becoming a strict contrarian; going against the crowd can get ugly, too. Instead, become an independent agent, and go your own way. Learn to exercise control over your sources of information. Do your own homework, and act on it and it alone. To improve your chances of reaching good conclusions about the information you obtain, stick to areas in which you already have some expertise.

Popular posts from this blog

It Pays to be a Nervous Wreck

By Ramesh Akkineni
from an article in Livemint Two weeks ago, Microsoft issued the sort of quarterly report usually seen of a company in finest mettle. Redmond’s sales were up 15% and profit double that, excluding certain deferrals. And the rest of the year, it projected, would be just as sanguine—certainly unlike in the economy as a whole. Elsewhere, that would be a mandate for staying the course. In Redmond, though, they were crossing off days on their calendars, waiting until Friday, the first day of February and thus the first opportunity Microsoft would be able to truthfully state, “Okay, Yahoo, it’s been a year since we talked to you guys; where’s the beef?” Microsoft remains obsessed about Google because it reads the same things everyone else does about how Google’s style of free, “in the cloud” computing means the slow and steady decline of Windows and Office. That’s a technical debate, one in which both sides have good arguments. But....
Read more

Korean Model

By Ramesh Akkineni
from an article by Ha-Joon Chang in the Guardian In my lifetime Korea has lived through one of the greatest development miracles – half a century ago, its annual per capita income was around £50, less than half that of Ghana at the time. Today, it stands at £12,000, putting it on a par with Portugal and Slovenia. How was this possible? Korea of course did things that most people agree are important for economic development, such as investment in infrastructure, health and education. But on top of that, it also practised many policies that are now supposed to be bad for economic development: extensive use of selective industrial policy, combining protectionism with export subsidies; tough regulations on foreign direct investment; active, if not particularly extensive, use of state-owned enterprises; lax protection of patents and other intellectual property rights; heavy regulation of both domestic and international finance. The Korean experience shows that sustainabl...
Read more

Wild West

By Ramesh Akkineni
From an article in San Jose Mercury News by John Boudreau Not long ago, Tsoi Chun Bun made potato chips. Now he designs and sells millions of mobile phones a year. He is one of hundreds of young entrepreneurs seeking overnight fortunes in Shenzhen Inc. — the Wild West of the mobile-phone industry. Phones made and designed by these Chinese vendors will account for about a third of the 1.1 billion cell phones that will be sold around the world this year. Three decades ago, Shenzhen was China's first city to experience market-oriented economic reform, unleashing anything-goes capitalism that has spread throughout the nominally capitalist country. And while China's mobile-phone industry has spread beyond Shenzhen, the southern region remains a center of the mobile-phone ecosystem that inspires dreams of instant success. "It is China's version of the Gold Rush," said Shanghai-based Ken Qing Wang, general manager of the China operations of Silicon Valley-based Tele...
Read more