Somewhere between Wonderland and Through the Looking-Glass, Alice called us all out when she confessed, “I give myself very good advice, but I very seldom follow it.” Which of us has not had to admit the same in the face of a self-inflicted bit of financial folly? And today, as the world seems to spin around us with the confused fury of a storm at sea, how can we keep our path true? I offer up an observation for your consideration.
The term “Madness of Crowds” originally entered my vocabulary as a teenager when I read – admittedly somewhat fitfully – Charles MacKay’s Extraordinary Popular Delusions and the Madness of Crowds, first published in 1841. Though much of the book is now long forgotten, the chapters describing a history of financial bubbles remains often quoted by really smart guys like Michael Lewis. To quickly summarize the substance of MacKay’s idea with a quote from the book, “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”
Though MacKay discusses the Dutch Tulip Mania of the 1630’s and Mississippi Company Bubble of the 1720’s, we need only look back to the DotCom crash of 2000 and the subprime chaos of 2008 for a personal and up-close look at our own propensity to become part of a crowd that ultimately gets roughed-up financially. Yet there is another way to consider this tendency as it occurs in a less visible but equally damaging way.
This current bull market, starting in 2009 – now the second longest run on record – was missed by many who clung to the notion that the future would look like the immediate past, a very common bias we all suffer from to varying degrees. As measured by the American Association of Individual Investors (AAII), while markets have doggedly moved up to all time record highs, the percentage of their members with a bullish sentiment has been under 50% for 108 weeks. So it is not necessarily that we suffer a financial loss from following the crowd, but that we lose opportunity.
Probably worth noting that in 1845, four years after MacKay published his book on the madness of crowds, he had the following to say about what would become known as the British Railway Mania, “There is no reason whatever to fear a crash.” He was wrong. Later editions of his book include a section about the Railway Mania crowd that he ultimately joined. Go ask Alice, indeed.
Finally, this week’s issue of Barron’s includes a letter to the editor noting that many of the pundits who rallied against a Trump presidency are now beneficiaries of the post-election rally. Specifically, according to Bob Barcell from Fort Collins, CO, “By my reckoning, over half of Barron’s top 50 bullish picks for 2016 owe better than half of their gains to the Trump Bump. Outside of Gotham, it is nothing short of sidesplitting to watch you breaking your collective arms patting yourselves on the back for the results of the thing you railed against, told us couldn’t happen, and swore we would regret if it did.”