Is It Ever the Smart Thing To Do?

It’s pretty clear that many of those investors caught by the crash of the credit bubble in 2008 were following the crowd.  Collectively, watching each other, fiercely competing in the pursuit of increasingly unrealistic gains, they ignored the abundant danger signs in the economy.  But what about the short sellers, those saw those danger signs and scored when the bubble burst?  What made it possible for them to keep their eye on the economy and avoid following the crowd?

The Big Short, by Michael Lewis, offers profiles of those contrarian investors – many of whom ended up making hundreds of millions of dollars.

Some of them seemed to suffer from a mild neurological disorder that impaired their ability to read the emotional signals of others.  That had led them to become somewhat reclusive, even anti-social, as they had learned to mistrust those with whom they had difficulty getting along.  Instead, they trained themselves to rely on more objective information, such as charts, mathematical formulas, and the actual behavior of other traders, what they did, not what they said.

Another group of contrarian short sellers were motivated by strong anti-authoritarian feelings.  They viewed successful, establishment figures with hostility.  Disliking all authorities, they were eager to prove them wrong, and searched for ways to expose their weaknesses.  They got pleasure out of their vulnerabilities.

Most of us couldn’t strictly emulate such behaviors, even if we wanted to.  They aren’t great ways to make friends or get along with others on the job.  Still, we can learn some lessons from their example.

We can become more aware of the pull that crowd psychology exerts on us.  Rather than feel reassured that others are thinking the same way we are, we might begin taking that as a potential danger sign, an indication we need to become more skeptical and search out different points of view. Bucking the trend is not a sure sign of greater wisdom, but it can serve as an essential corrective.

And, then, we can be more skeptical about authority.  Just because a stock analyst or highly visible columnist stakes out a position doesn’t mean that they are more reliable guides to market behavior.  To be sure, they spend more time reading about and researching companies in the market, but they also read each others work, and they worry about deviating too far from what others say.  They are not immune from the pressures of crowd psychology – and they can’t actually see into the future.

A good rule of thumb is to pause before you leap.  Talk it over with someone else.  Remember past mistakes.  Worry about your own excitement over a new investment “opportunity.”  Hedge your bets.

(Originally published in in Mindful Money)