You Gotta' Go Where They Ain't

WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK.  FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON

You get in your car to go to work and turn on the radio.  The traffic reporter advises that the expressway you use everyday is totally bogged down and traffic is at a crawl because of a multi vehicle accident.  Do you follow your usual pattern and drive to the on ramp?  Obviously not.  You take an alternate route to avoid the traffic jam; you avoid the crowd.  Many of the authors we have discussed advise against joining investment crowds.  Some investors take an additional step.  They not only try to avoid being sucked into the emotions of the market crowd; they also take the affirmative step of heading in the opposite direction.

Most parents can remember their children's "terrible twos."  As a two year old takes those first steps towards independence, the little tyke will repeatedly resist parental commands.  "No" becomes his or her mantra.  Over the years, countless mothers have looked at their little rebel and said, "You are so contrary."

Humphrey B. Neill, known as The Vermont Ruminator, wrote The Art of Contrary Thinking in 1954.  It has undergone five editions and fourteen printings since then.  His opening line in the book is, "When everyone thinks alike, everyone is likely to be wrong."  He counseled his readers to avoid the crowd mentality that rules Wall Street, citing to our old friend, Gustave Le Bon and his book, The Crowd.  You may recall that we explored Le Bon's book in detail in earlier blogs.

Mr. Neill did not subscribe to the blanket idea that the crowd was always wrong.  He drew a finer distinction and felt that the crowd was most likely to be wrong at certain times in a market trend.  He had the following to say about the crowd:

Is the public always wrong?  This is probably the most frequently asked question about the Theory of Contrary Opinion.  For a correct answer we need to change the words in this question.  Let me put it this way:  Is the public wrong all the time?  The answer is decidedly, "No."  The public is perhaps right more of the time than not.  In stock market parlance, the public is right during the trends but wrong at both ends.  One can assert that the public is usually wrong at junctures of events and at terminals of trends.  So, to be cynical, you might say, "Yes, the public is always wrong when it pays to be right --but is far from wrong in the meantime."  (author's emphasis in bold)

Neill noted that no investor, including the contrarian, can accurately forecast such junctures of events or terminals of trends.  The contrarian, sensing the ongoing rush of crowd emotion, will usually find himself or herself leaving the market "party" early.  The departure may be weeks or even months ahead of the "game changing" event or "end of the trend", but it is better to be safe than sorry.  Like Cinderella, many investors stay at the ball way past midnight and rue that delay the morning after.  Neill believes this to be simply human nature, which he described as follows:

It has been my observation over a long period that it takes us average humans a considerable interval to shift our viewpoints, once we have established a given mental outlook.  That is, if we have (mentally) accepted a trend as moving in one direction, we are not inclined to change our outlook until well after the trend turns.  (author's emphasis in bold)

Humphrey B. Neill was the author of several books on investing, some of which we will look at in future blogs.

The excerpts from The Art of Contrary Opinion by Humphrey B. Neill, copyright 1954, 1956, 1960 and 1963 are used with the permission of the publisher, Caxton Press, Caldwell, Idaho; www.caxtonpress.com

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