(Courtesy: Chart of the Day)
By Alan Steel
The perfect indicator according to history is crowd sentiment and where they’re rushing to invest. Follow that and go in the exact opposite direction. Not at all comfortable mind you.
In fact, according to a recent study by Yale behavioural economist Dan Kahan, the use of reason in a discussion can actually aggravate a situation.
And while I’m always very hesitant to plug the findings of economists there are a few interesting parallels to be drawn – between investor and political sentiment and decision-making – from a recent article about Kahan’s findings here.
It shows how folks will tend to side with the opinions of crowds (going partisan) at times when they know the least about a subject area.
Dan Kopf of QZ writes:
“Perhaps Kahan’s most disconcerting finding is that people with more scientific intelligence are the quickest to align themselves politically on subjects they don’t know anything about. In one experiment, Kahan analyzed how people’s opinion on a unfamiliar subject are affected when given some basic scientific information, along with details about what people in their self-identified political group tend to believe about that subject. It turned out that those with the strongest scientific reasoning skills were the ones most likely to use the information to develop partisan opinions.”
While it’s a continuous curiosity how reason tends to fail the crowd psychology litmus test, the examples of financial partisanship leading to investor folly are demonstrably the norm.
And with the media’s near daily (hourly, minute-by-minute) stock market mewlings – despite the rather obvious long-term upward trend in major indexes like the Dow Jones (Pictured above – Courtesy Chart of the Day) and the outright complexity of financial markets, it’s clear that partisan decision-making in investing is the typical fall back device (and about as helpful as an inflatable crutch).
Ben Carlson of A Wealth of Common Sense writes:
“When asked about the potential for the sector in question I was reminded of this chart I created a couple years ago, which I have updated through last Friday:
“Like any asset quilt, there’s no rhyme or reason from one year to the next. I’m sure you could torture the data here using a momentum or value-based strategy to improve upon the results of the S&P 500, but unless you’re using a rules-based approach, you’re really just guessing when attempting to figure out which sectors will perform best over any given time frame.”
Investing is a tough game, particularly without formal training, the support of world class research and years of experience in the trenches.
So it’s little wonder the investor crowd runs in the same direction when it comes to financial and investment matters – and usually the wrong way – doing things like buying ISAs and bond funds when interest rates are at their lowest ebb in centuries, avoiding stocks despite the very reasonable perspective that we’re in amongst a secular (long-term) bull market, and cashing in pensions early for cars and holidays in place of guaranteed returns.
And no amount of logic seems to convince the masses that the herd is (once again) heading for a cliff.
Sadly, only a relative few will ever think about their decision-making – too deafened by the sound of the thundering hoofs all around them – and have a chance of growing wealthy by blocking out that noise.
So why not use some reason and common sense and get some good advice for for Christmas.
It’s probably the best present you’ll ever give yourself.
And after all, it’s your money.