This is quiet intersting. What are your thoughts on crowd behavior. An Understanding of Crowd Psychology Is Vital As individuals, we tend to behave in an intelligent, controlled manner - at least most of the time. When we become members of a crowd, however, our behaviour can change quite considerably. Human beings become members of crowds, and follow the crowd, because: Being a member of a crowd gives them a feeling of security. Following a strong leader allows them to feel reassured. Doing what others do helps to combat a fear of uncertainty. We have felt secure being members of different groups all of our lives, and hence we are conditioned to wanting to become a member of a group. As members of a crowd, we tend to follow the crowd leader, and to trust the judgement of the crowd leader more than our own judgment. In the case of trading, the crowd leader becomes 'price'. Members of crowds tend to respond only to very obvious changes (such as a market crash), and not slow, subtle changes, such as a bull market slowly making a topping pattern and turning downwards. They also become more emotional and impulsive - which is not a desirable characteristic of a trader. An understanding of crowd behaviour will help you to understand how traders become mesmerised by roaring bull markets, and how they fail to see the clear warning signs that the market is becoming dangerously overbought. Such an understanding can make you, and save you, a great deal of money! An understanding of how individuals behave when they are a member of a crowd is very important for a trader, as there are times when a trader must do the exact opposite to what the crowd is doing. In trading, this understanding comes from studying the theory of contrary opinion. To be a professional trader, you need to be able to analyse what 'the crowd' is doing at any one time, and be prepared to do the opposite should your trading system give you a signal to do so. At the very least, you should exercise the utmost care when you observe extreme crowd behaviour. By Neil A Costa http://www.marketmasters.com.au/33.0.html
Your posting makes sense by itself but you have to consider that today's "crowd" in today's markets is a relatively small number of professional money managers who manage enormous sums of money. It's not really a large number of retail investors anymore because they have turned their money over to someone else; i.e. mutual funds, banks, insurance companies, hedge funds et al. Those "pros" are a little more level-headed but still capable of doing the wrong thing at the wrong time.
I agree that contrary thinking and trying to figure out sentiment is key. Perhaps more important than any single factor. My former screen name started a thread here calling for a top in the S&P. Most people who chimed in agreed. Hence I quickly cut my shorts down to relatively painless number. (I still have 'em.) The bearishness in housing has me bullish. I was a housing bear until I saw how crowded that view became. However I disagree with the reasons you cite as the cause of consensus thinking. My years as a floor trader gave me the opportunity to see how a couple of hundred people at a time might build various positions. IMO we all tend to see things the same. We react to events in virtual unity. If a report has negativity, suddenly no one is a buyer. That has nothing to do with comfort or conformity, rather it has to do with perception of future valuations. Most of the time when we try to be contrarian we're merely falling in line with everyone else....
I dont believe there is any such thing as a "professional". Let me give you a few examples that some of us are familiar with... During Hurricane Katrina, there was a doctor and two nurses who had ordered the unthinkable. They made a decision that all was lost after three days and decided to kill some of the patients. http://www.nytimes.com/2006/07/18/u...e1237e67e6f588&ei=5088&partner=rssnyt&emc=rss This was a doctor who had undergone years of intensive schooling, training and certifications. These were two nurses who had undergone schooling, training and certification. All were very experienced. These were professionals, but they had made the decision to kill patients only after 72 hours into a bad situation. As for money managers, there were plenty of them at Fidelity during the late 90s who plowed cash into some stocks that were clearly inflated. In fact, there were many money managers in the late 90s who did just that. The result was billions of dollars in lost cash. There were only a few investment vehicles that lasted through it without a loss. Among them were Berkshire-Hathaway and the Wellington Fund. Lastly, let me point out something that you may not have noticed. The Empire State Building. It was designed so that an airship could dock at the very top. However, no one was thinking just how dangerous it would be to dock an airship with a handful of passengers right over mid-town Manhattan. It did make for a nice design and radio tower, but that was not the intent. They had even built a ticket office and a lounge for passengers of airships. This is now the observation deck. After a few attempts to dock an airship, they decided it wasnt a good idea anymore. A group of "professionals" had designed the Empire State Building and men with large amounts of cash&knowledge were in charge of the project. However, they clearly missed the most obvious fact. Why would you want to dock a large airship filled with hydrogen over midtown Manhattan? There is a crowd of "professionals" that use Route 208-Route 4 in New Jersey to get to Manhattan everyday. Everyday at a certain time in the morning, the road is completely jammed. If they would only show up on the same road 30 minutes early, then there is no traffic. In the many decades that I have used this road, no one has ever figured it out. Similiarly, there is a McDonalds and Donkin Donuts drive-thru that everyone seems to use at the same time with cars coming out the sides. If they would just get there at the right times. I have concluded that everyone is human and there are very few "professionals". The only real professionals in the market are the well known names that we have all heard of like Eddie Lambert, T. Boone Pickens and Warren Buffett. Everyone else just seems lucky and were at the right place at the right time. I consider Marc Cuban "lucky". He created this broadcast.com which probably wouldnt be worth too much today to Yahoo. I dont even think yahoo even utilizes broadcast.com anymore. Marc gets on CNBC and then says these ridiculous things and engages in these horrible projects. I remember he said that MP3s would never catch on. I have a list of things. When he starts talking, he looks like a crazy man with his hair everywhere. Not a professional. A "professional" is someone who carefully plans his moves, has action plans and highly disciplined. During the late 90s when Warren Buffets Berkshire Hathaway was weakening, they did not give into the temptation of investing into tech. They kept going with their highly disciplined approach that eventually paid off some 7 years later. By the way, that Berkshire stock went from 100 to 107 in just 30 days, 7% return in 30 days!!!! P/E of 13 So in any group of successful people, most of them are just lucky with a sprinkling of true professionals. As for myself, I am past the point in life where I care if I was just lucky or a true professional.
I think of it like this. When I go to the movies, I want to be the first one in so I can get a seat. I will sit there all alone patiently waiting for it to start. However, when the movie is just about to end and the lights go on, I want to be out of the movie before everyone else. When everyone starts heading for the door, it gets a lot harder to leave the movie and get out of the parking lot. . . Just like over the summer, while everyone was out enjoying the beach. Some guys were indoors squinting at screens and building a portfolio. Then once they took their positions, they waited. It was a mind boggling wait as the stocks meandered about with uncertainty. Then everyone got back from the beach and wanted to trade. That same guy who was sitting indoors during the summer is now quietly exiting out of his old positions and taking positions in defensive stocks that have done poorly over the last 3 months, i.e CVS.
Great post but just one bone of contention. Would the road not be as crowded early as it is at the later hour presently, if the crowd of "they" attempted their commute 30 minutes earlier?