ACCORDING to Victor Niederhoffer, there’s nothing to be gained by studying what other speculators are doing or have done, as only "in the humdrum everyday experiences, combined with the wisdom of immortals, does one learn the nitty-gritty of buying low and selling high".
"If I did hold an ‘open sesame’ to the markets, I wouldn’t share it," he says in his book The Education of a Speculator. "There is ample opportunity to use wealth in this world, and neither I nor my friends, nor anyone else I have ever met, has so much of it that they are interested in putting themselves at a disadvantage by sharing their secrets. This would only cast their ‘edge’ into oblivion and return them to being mere mortals who struggle for their daily bread. Man cannot live by bread alone, but it helps if others don’t bake it using your recipe."
So, shared "recipes" may not be worth their salt and a good speculator has to act alone.
Howard Marks points out: "Nonconsensus ideas have to be lonely. By definition, nonconsensus ideas that are popular, widely held or intuitively obvious are an oxymoron. Thus such ideas are uncomfortable; nonconformists don’t enjoy the warmth that comes with being at the centre of the herd. Further, unconventional ideas often appear imprudent. The popular definition of "prudent" — especially in the investment world — is often twisted into ‘what everyone does’ ".
"A corresponding desire to stay in the middle afflicts most speculators, myself included," Niederhoffer concedes. "I am too frightened to buy something in the market when it goes straight down, and too frightened to sell it when it goes straight up. But after it has retracted a good part of the move, I am all too ready."
Confirming what Francis Galton wrote centuries ago, that "the vast majority have a tendency to shrink from the responsibility of standing and acting alone. They exalt the vox populi … even when they know it to be the utterance of a mob of nobodies". Unfortunately, it seldom pays off.
As Hans Hvide and Per Ostberg confirmed in a study of coworkers’ investments published in the Journal of Financial Economics, while their investment decisions are positively correlated, it doesn’t result in higher returns. "Overall," they say, "we find a strong influence of coworkers on investment choices, but not an influence that improves the quality of investment decisions."
In his book, Investment Mistakes Even Smart Investors Make and How to Avoid Them, Larry Swedroe covers 77 common errors investors make, but says he should have included one more: "discussing individual stock buys or sells at the water cooler".
"The crowd always loses because the crowd is nearly always wrong. It is wrong because it behaves normally," wrote Fred C Kelly in Why You Win or Lose: The Psychology of Speculation, published in 1930. He attributed his success in the market to his ability to go against the crowd, noting that "every natural human impulse seems to be a foe to success in stocks. That is why success is so difficult. If you think it is easy to do invariably the opposite of what seems to be the sensible thing everybody else is doing, just try it. At every step one is tempted to do that which seems logical, but which is nevertheless unwise."
Humphrey B Neill wrote after the 1929 crash: "In as much as it is impossible to accurately time the reactions of the crowd, it is imperative to look on the unsuspected side of all questions and all predictions." In his book, The Art of Contrary Thinking, he said: "Obvious thinking — or thinking the same way in which everyone else is thinking — commonly leads to wrong judgments and wrong conclusions … if you wish to keep from guessing wrong, you need to learn to throw your mind into directions which are opposite to the obvious … concerning most subjects, it is pretty safe to say that the crowd is usually wrong — at least in the timing of events.
"Not to say that people are wrong in their philosophies concerning their everyday living. But that when masses of people succumb to an idea, they often run off at a tangent …. When people stop to think things through, they are sane in their decisions. It is when something has wide emotional appeal that you find the crowd going wrong."
Neill concluded: "I believe that it is a matter of getting into the habit of looking on both sides of all questions and then determining from your two-sided thinking which is the more likely to be the correct version in order to avoid being entrapped."
Swedroe says much the same in his assessment of "water cooler advice". He writes: "For most, I expect it was just another of several inputs. If a conversation gives you something good to think on, well then fine ... I’m sure I could talk to my coworkers and find a couple that have some interesting ideas … to look into, and it’s always good to take in alternative viewpoints and reassess your beliefs."
In his book The Start-up of You, LinkedIn cofounder Reid Hoffman says being a contrarian is not enough. Success happens when "you’re both contrarian and right." The question, then, is what type of "thinking what everyone else is thinking" is worth taking in and what is best ignored?
Paul Merriman, of Merriman, in Seattle says the latter includes the following: believing in the promise of what’s popular in the press and among other investors; ignoring costs and buying into funds with high fees in the belief that it pays for brighter managers who produce above-average returns; building a portfolio based on what you’re told is going to happen next; taking advice from the media on the assumption that they are there to help; making decisions based on how much money you hope to make, as opposed to how much you might lose; ignoring risk in the belief that no price is too high; and loading up on asset classes that are in vogue on the assumption that whatever’s happening will keep happening.
In other words, the sort of stuff we already know to be balderdash. Whereas the sort of things wannabe contrarians should perhaps be asking themselves is whether trying to time the markets is really such a bad idea, index investing is really such a good idea and where there may be the guarantee of positive returns in the long term.
In his book The Start-up of You, LinkedIn cofounder Reid Hoffman says being a contrarian is not enough. Success happens when 'you’re both contrarian and right.' Picture: REUTERS/STEPHEN LAM
ACCORDING to Victor Niederhoffer, there’s nothing to be gained by studying what other speculators are doing or have done, as only "in the humdrum everyday experiences, combined with the wisdom of immortals, does one learn the nitty-gritty of buying low and selling high".
"If I did hold an ‘open sesame’ to the markets, I wouldn’t share it," he says in his book The Education of a Speculator. "There is ample opportunity to use wealth in this world, and neither I nor my friends, nor anyone else I have ever met, has so much of it that they are interested in putting themselves at a disadvantage by sharing their secrets. This would only cast their ‘edge’ into oblivion and return them to being mere mortals who struggle for their daily bread. Man cannot live by bread alone, but it helps if others don’t bake it using your recipe."
So, shared "recipes" may not be worth their salt and a good speculator has to act alone.
Howard Marks points out: "Nonconsensus ideas have to be lonely. By definition, nonconsensus ideas that are popular, widely held or intuitively obvious are an oxymoron. Thus such ideas are uncomfortable; nonconformists don’t enjoy the warmth that comes with being at the centre of the herd. Further, unconventional ideas often appear imprudent. The popular definition of "prudent" — especially in the investment world — is often twisted into ‘what everyone does’ ".
"A corresponding desire to stay in the middle afflicts most speculators, myself included," Niederhoffer concedes. "I am too frightened to buy something in the market when it goes straight down, and too frightened to sell it when it goes straight up. But after it has retracted a good part of the move, I am all too ready."
Confirming what Francis Galton wrote centuries ago, that "the vast majority have a tendency to shrink from the responsibility of standing and acting alone. They exalt the vox populi … even when they know it to be the utterance of a mob of nobodies". Unfortunately, it seldom pays off.
As Hans Hvide and Per Ostberg confirmed in a study of coworkers’ investments published in the Journal of Financial Economics, while their investment decisions are positively correlated, it doesn’t result in higher returns. "Overall," they say, "we find a strong influence of coworkers on investment choices, but not an influence that improves the quality of investment decisions."
In his book, Investment Mistakes Even Smart Investors Make and How to Avoid Them, Larry Swedroe covers 77 common errors investors make, but says he should have included one more: "discussing individual stock buys or sells at the water cooler".
"The crowd always loses because the crowd is nearly always wrong. It is wrong because it behaves normally," wrote Fred C Kelly in Why You Win or Lose: The Psychology of Speculation, published in 1930. He attributed his success in the market to his ability to go against the crowd, noting that "every natural human impulse seems to be a foe to success in stocks. That is why success is so difficult. If you think it is easy to do invariably the opposite of what seems to be the sensible thing everybody else is doing, just try it. At every step one is tempted to do that which seems logical, but which is nevertheless unwise."
Humphrey B Neill wrote after the 1929 crash: "In as much as it is impossible to accurately time the reactions of the crowd, it is imperative to look on the unsuspected side of all questions and all predictions." In his book, The Art of Contrary Thinking, he said: "Obvious thinking — or thinking the same way in which everyone else is thinking — commonly leads to wrong judgments and wrong conclusions … if you wish to keep from guessing wrong, you need to learn to throw your mind into directions which are opposite to the obvious … concerning most subjects, it is pretty safe to say that the crowd is usually wrong — at least in the timing of events.
"Not to say that people are wrong in their philosophies concerning their everyday living. But that when masses of people succumb to an idea, they often run off at a tangent …. When people stop to think things through, they are sane in their decisions. It is when something has wide emotional appeal that you find the crowd going wrong."
Neill concluded: "I believe that it is a matter of getting into the habit of looking on both sides of all questions and then determining from your two-sided thinking which is the more likely to be the correct version in order to avoid being entrapped."
Swedroe says much the same in his assessment of "water cooler advice". He writes: "For most, I expect it was just another of several inputs. If a conversation gives you something good to think on, well then fine ... I’m sure I could talk to my coworkers and find a couple that have some interesting ideas … to look into, and it’s always good to take in alternative viewpoints and reassess your beliefs."
In his book The Start-up of You, LinkedIn cofounder Reid Hoffman says being a contrarian is not enough. Success happens when "you’re both contrarian and right." The question, then, is what type of "thinking what everyone else is thinking" is worth taking in and what is best ignored?
Paul Merriman, of Merriman, in Seattle says the latter includes the following: believing in the promise of what’s popular in the press and among other investors; ignoring costs and buying into funds with high fees in the belief that it pays for brighter managers who produce above-average returns; building a portfolio based on what you’re told is going to happen next; taking advice from the media on the assumption that they are there to help; making decisions based on how much money you hope to make, as opposed to how much you might lose; ignoring risk in the belief that no price is too high; and loading up on asset classes that are in vogue on the assumption that whatever’s happening will keep happening.
In other words, the sort of stuff we already know to be balderdash. Whereas the sort of things wannabe contrarians should perhaps be asking themselves is whether trying to time the markets is really such a bad idea, index investing is really such a good idea and where there may be the guarantee of positive returns in the long term.
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