October 26, 2011
The following was written by Jawad Mian, Portfolio Manager based in Doha, Qatar
By any simple measure, my life has been one ruled by conformity. I wasn’t a rebel growing up. I didn’t smoke, drink, or pursue one-night stands. Nor was I a part of the Satwa G’s or Abu Shagara Boys. They were the bandana-wearing bikers (bicycles, at the time) that roamed the streets looking for trouble. I simply espoused my parent’s values and strived to be the ‘good’ son. In school, I wasn’t the prankster or the bully. I was quiet and just plain shy. Not surprisingly, that didn’t get me anywhere with the ladies. Maybe, I should’ve worn a leather jacket and have gel-infused hair. Grease style. In any case, if it weren’t for my fancy dance routine in the annual talent show to the tune of Cher’s Dov’e L’amore, I was probably going to be ‘the guy most likely to be forgotten’ because I quite simply blended in with the crowd.
I hate being part of the crowd. No, I’m not socially awkward. I don’t have Asperger’s in case you’re wondering. Even if I did, however, that may not be such a bad thing if you ask Dr. Michael Burry who lives with the ‘disorder’. In light of which (or, in spite of) he saw the world differently and spotted the bubble in the subprime-mortgage bond market long before anyone else. He put on ‘the greatest trade ever’ and raked in a modest hundred million dollars for himself. Not to mention that he became the star in Michael Lewis’ The Big Short to boot. That’s not half bad. Dr. Burry bet against the crowd and won. For according to investment mythology, the crowd must always be wrong. Toujours.
People consider investing to be a science which is studied and ruled by their models, and not an art to be felt. The whole investment process is rife with statistics, tables, mathematics, and dazzling reason. The famous stock market speculator Bernard Baruch said, ‘But what actually registers in the stock market’s fluctuations are not the events themselves, but the human reactions to these events. In short, how millions of individual men and women feel these happenings may affect their future. Above all else, in other words, the stock market is people. It is people trying to read the future. And it is this intensely human quality that makes the stock market so dramatic an arena, in which men and women pit their conflicting judgments, their hopes and fears, strengths and weaknesses, greeds and ideals.’
Crowds are everywhere distinguished by feminine characteristics. The crowd does not reason. It only thinks it reasons. As presented by the savvy Mister Johnson in Adam Smith’s ‘The Money Game’, a crowd of men acts like a single woman. The mind of a crowd is like a woman’s mind. Then, if you have observed her a long time, you begin to see little tricks, little nervous movements of the hands when she is being false. Good research and good ideas are the one absolute necessity in the marketplace. But, we must also concede that markets move in cycles like all other rhythms of life. There is nothing so disastrous as a rational investment policy in an irrational world.
The market behaves like a crowd, and if you’ve read Gustave Le Bon’s ‘The Crowd’ you know a crowd is a composite personality. According to Dr. Le Bon the most striking peculiarity of a crowd was that whoever be the individuals that compose it, however like or unlike be their mode of life, their occupations, their character, or their intelligence, the fact that they have been transformed into a crowd puts them in possession of a sort of collective mind which makes them feel, think, and act in a manner quite different from that in which each individual of them would feel, think, and act were he in a state of isolation. I don’t believe myself to be completely outside of it but I sure as hell try.
The good Dr. Le Bon said that just from being in a crowd, a sentiment of invincible power overcomes us and the sentiment of responsibility which always controls individuals disappears entirely. And once we have dissolved responsibility, we are ripe for contagion and suggestibility and acts of irresistible impetuosity. The phenomenon of precisely such a hypnotic order has provided the premise of umpteen manias and bubbles throughout our history. From Dutch tulips through to Souk al Manakh where the unofficial Kuwait stock market had the third largest market cap in the world behind only the US and Japan and ahead of the UK and France. The list goes on. Men, it has been well said by Charles Mackay, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.
It is really quite comfy to be part of the crowd. It has to do with people wanting the same things I imagine. Making the same mistakes. The kind of feeling you get when your friends do just as poorly on an exam as you. Or when you find ‘comfort’ in being down ‘slightly less’ than the benchmark even if the market goes down by 40 percent on the whole. Lord Keynes long ago opined that “investment based on long-term expectations is so difficult today as to be scarcely practicable. He who attempts it must surely lead much more laborious days and run greater risks than he who tries to guess better than the crowd how the crowd will behave; and given equal intelligence, he may make more disastrous mistakes.” It is certainly better to be comfy, everybody will agree, than not to be. Right?
Just remember, to quote Ralph Waldo Emerson – it is easy in the world to live after the world’s opinions; it is easy in solitude to live after your own; but the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.
Jawad S. Mian
Direct: +974 4405 6557
Mobile: +974 3343 3711