I heard a speaker make a great observation at a major conference I was speaking at. He said: “95% of people are a genius at something.”
That doesn’t mean they’ll be Einstein or a CEO of a large corporation or a visionary entrepreneur… it just means everyone displays their brilliance in other, sometimes less-noticeable ways.
I have always found that to be true. I am good at what I do, but horrible at so many other things. I couldn’t fix a door knob if you gave me a ten-step, illustrated guide with online assistance from a personal consultant!
But when it comes to investing, the numbers are opposite. Most people — let’s say 95% or more — are not good at this. Financial advisors regularly tell me that the most intelligent, educated, and high-income professionals, like doctors and lawyers, are often the worst investors.
They think their intelligence in their respective fields naturally transfers over to an equally specialized field like investing… but it rarely does!
When markets are near major tops or bottoms, and even in most of the swings in between, surveys of everyday investors will almost always show that the investment mood or “sentiment” of the great majority is dead wrong.
Psychological surveys show that the great majority of people are risk averse. They fear loss more than they value gain. It’s the same with pleasure and pain…
Studies have shown that when rats are presented a drug and left in isolation, they have absolutely no aversion to taking the drug and screwing up their lives… but when you put them in a healthy, safe environment with other rats, most of them stop! The loss of a good, normal life simply terrifies them.
The crucial point is, humans are social creatures, and whichever way the herd goes, we follow.
Our monetary leaders have encouraged us to spend wastefully and invest foolishly. And the majority of people respect and trust the words they hear from on high. So, they follow!
In other words, they hijack our risk-averse nature… by appealing to our social instincts.
So, the majority of us don’t buy near bottoms when the value and potential gains are the greatest… because we’ve been encouraged to buy when the media reports on what’s already happened — the markets are going up! But by that point, we’ve missed out on tremendous gains.
We feel more comfortable when the markets are rising, so we buy in. The media reinforces it… other investors reinforce it. Going with the herd alleviates our risk-averse nature.
The problem is, such behavior actually increases the risk.
Markets peak when the last risk-averse person — the “dumb money” — finally piles in. By that point, there aren’t any more suckers to buy in, and the economy looks or seems great because we’re approaching the peak. With no more idiots to pile in, there’s nowhere else for the market to go but down!
How did the Japanese economy look in late 1989 before their biggest crash and downturn in the last century?
How did the United States, the world economy, and consumer sentiment look in late 1929? Or in late 2007?
The best long-term investors, like Warren Buffett, or even shorter-term traders like our own Adam O’Dell — who’s one of the best short-term traders I know — think the opposite of the herd, and have indicators to measure the herd’s fatal instincts.
It’s folks like these who see the highly predictable nature of people and act accordingly that make investing seem simple. It’s still much more complicated than that, but again, we’re all a genius at something. I can’t do what Buffett does, nor Adam… and that goes both ways.
What I can tell you is that the markets are heading for a nightmare scenario, and the dumb money has already largely piled in.