The crowd isn't always wrong. The crowd just generally stays to long. That is the crowd stays to long at the top and stays either too short or out of the market at the bottom.
The aforesaid is vague! The issue raised by MS was... is the 'crowd' (meaning the many beginning to seemingly throw their money at the current move/trend) always 'wrong'... as the conventional wisdom claims! I take "crowd" to mean those buying (or selling) seemingly without aforethought or consideration (of any dramatic change or reversal in the momentum and price trend of an equity or index) AND representing what seems to be large segments of the trading and investing community. In other words when many become filled with overly positive or negative sentiment of less or more risk.... as the current scenario (up or down) unfolds, we have a crowd. The crowd exhibits elements of both complacency and froth, giddiness and over-confidence in their so-called "convictions". Or excessive fear and a willingness to throw all babies out with the bath water. I take 'crowd' to mean actually "crowded"! This is often represented by (among other things) major financial publications running cover stories making bold declarations, cable shows and garden variety newscasters doing the same; declaring what is happening after the fact as something most likely to continue. We find many discussing the current state of affairs as one which is more and more certain, and thus not likely to change anytime soon! This in turn encourages more frivolous (and highly impatient) buying or selling.... with less and less regard for risk, or opportunity ! And the trend continues and picks up steam not only because the crowd is made up of those that are right for the moment.... in that time frame... but because of those that are wrong and must exit, switch biases in order to preserve capital and protect against mounting losses. In other words the "crowd" is made up of those that are right AND those that are wrong... until equilibrium is once again achieved and the "madness" as it were returns to a more objective market reality, so to speak. As more and more participants "throw" more and more money at the markets or a specific equity, for example, and as prices move ever higher (or lower) there occurs an inflection point not unlike musical chairs where dynamics switch dramatically most often due to supply/demand considerations... contrary to the direction of the "trend" (crowd). Babak has started a journal on this subject, and also a thread on the vix and 200 day average (as I recall) which seemingly deal with when a given move or condition in the markets is such that one might correctly characterize it as comprised of a (maddening) crowd... and ergo crowded. For as a trader it does not matter much whether the proverbial "crowd" is wrong unless and until one is able to handicap when there is such a state of affairs. Ice