G. Marx, Investment Advisor
I don’t watch very much TV but I happened upon CNBC’s mid-day market coverage one day last week. This will not be news to regular viewers but I was nearly overwhelmed by the amount of information being offered. In addition to a series of stories in the main window, there were four sets of market quotations crawling across the screen, two at the top and two at the bottom. On the right side, there was more detailed information about specific companies, brief stories from other reporters and a calendar of future market-related events. Below that was a repeating cycle of promotional messages for upcoming CNBC programs, usually including video. Finally, the reporting in the main window was periodically replaced with a suggested stock trade. From my perspective, the only good news was that the sound was off in the restaurant so I didn’t have to try to listen at the same time.
As I watched, I tried to understand the appeal of what was being presented. How could a viewer possibly expect to assimilate and filter this barrage of information, let alone do so quickly enough to make a timely financial decision? Even if an investor could accomplish both tasks, how could the information be used to get ahead of the crowd, which seems like the most obvious reason for wanting it? Of course it’s illegal to trade on true “inside” information but I can see that would probably be an effective strategy if such data were available. My question for CNBC watchers: If you are one of hundreds of thousands of viewers, how unique is this information likely to be? I.e., if everyone else gets the same news at the same time, how can you hope to profit from it?
Most people I speak with understand the intrinsic value of seeking their own path instead of following the crowd but I’d like to share a story from investment advisor Don Hays. He was addressing a group of investors and asked those who considered themselves contrarians to raise their hands – almost everyone did. Of course, by definition the majority can’t be contrarian. When it comes time to make investment decisions, most individuals act more or less in concert with the rest of the group. Their best intentions aside, people apparently find comfort in being part of the crowd.
Beyond looking to information sources such as CNBC, some of those making their own investment decisions belong to the American Association of Individual Investors. This is a national organization which provides a template for forming and operating investment clubs. These clubs allow individuals to gather with friends in a safe and structured setting to learn more about investing. The AAII polls its 150,000 members weekly regarding their level of optimism about the stock market and compiles their responses into a Bullish/Bearish sentiment report which is updated every Friday. This report is one of the primary data points I consider when making strategic investment decisions for my clients. I pay attention because the sentiment of this group has been a nearly perfect contra-indicator of upcoming market actions. For whatever reason, it seems that investors operating in groups tend to make poor decisions.
According to news headlines, investors have poured nearly a trillion dollars into bond mutual funds since the beginning of 2008 while withdrawing about $400 billion from stock funds. Presumably this has happened because people who were not prepared for the market correction wanted to move to the seemingly safer haven of bonds. Of course, this rush of new money pushed bond prices up so early investors profited from the shift. When the tide turns, those who have most recently invested will have the most to lose and, if history is any guide, will be among the last to sell. These crowd-followers are all but guaranteed a loss when interest rates rise again.
This scenario has been replayed time and time again. Those timid souls who remain out of the market until confidence is high and there appears to be no remaining risk are the very ones who always seem to pay the price when the market turns, as it inevitably does. We live in a risky world but most risks can be managed in one way or another. Unfortunately, following the crowd has rarely proved to be an effective way to do so, especially related to investment strategy.
As Groucho, the Marx in today’s title, famously said: ” I don’t care to belong to any club that will have me as a member”. Investors may want to consider his stance regarding the value of following the crowd and think about taking independent action instead.