In one of his memos at Oaktree Capital, Howard Marks refers to the market as a pendulum swinging between greed and fear. That at any given time, the pendulum i.e. the general consensus tends to be either too greedy or too fearful, and it is when the pendulum is at its fearful extreme that the value investor comes into her own to make intelligent buys. This will sound familiar to most investors.
“Mimicking the herd invites regression to the mean” – Charlie Munger
“Be fearful when others are greedy and greedy when others are fearful” – Warren Buffett
The point of this post is not to belabour the obvious but to highlight how difficult it actually is go against “general consensus” and to sell when the market is hitting new highs or to buy when the opposite is happening.
There is stark evidence of how incredibly difficult it is for you and I to not succumb to the temptation of “going with the crowd”. The video below is the outcome of an experiment done by Solomon Asch, a pioneer in social psychology. The video was featured in an episode of a popular television series, “Candid Camera” in 1962
The experiment went like this. An unsuspecting subject enters an elevator. He’s joined by several of the show’s staff (the subject having no awareness that they are part of the staff). As the elevator makes it’s way up the building, the staff adopt various coordinated positions e.g. first by together facing the back of the elevator, facing the left, taking their hats off and so on. The objective is to observe the reaction of the test subject to these coordinated actions. What would you do if everyone around you does one thing?
It’s well worth the 2 min 31 seconds watch. Make sure to listen to the voiceover for context on what’s happening.
A million years ago, if everyone around you was screaming and running away from the big shadow moving towards your settlement, trying to be contrarian would mean you were quickly weeded out of the gene pool. The very fact that you exist means your ancestors did not make the mistake of pausing to question whether their screaming neighbours might be wrong. The need to conform to the behaviour of the crowd is deeply etched into your lizard brain, like a normal reflex action.
Which is why so few investors beat the market consistently. And it is also why it is an essential skill to develop, to be successful in the long run. Next time the lizard brain tells you to take action out of fear, of missing out, or of losing your savings, pause.
And consider this Rudyard Kipling classic:
If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or being lied about, don’t deal in lies,
Or being hated, don’t give way to hating,
And yet don’t look too good, nor talk too wise:
If you can dream – and not make dreams your master;
If you can think – and not make thoughts your aim;
If you can meet with Triumph and Disaster
And treat those two impostors just the same;
If you can bear to hear the truth you’ve spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to broken,
And stoop and build ’em up with wornout tools:
If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breathe a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: ‘Hold on!’
If you can talk with crowds and keep your virtue,
Or walk with kings – nor lose the common touch,
If neither foes nor loving friends can hurt you,
If all men count with you, but none too much;
If you can fill the unforgiving minute
With sixty seconds’ worth of distance run –
Yours is the Earth and everything that’s in it,
And – which is more – you’ll be
a Man an investor my son dear reader!
What bad design can teach us about investor behaviour – link