Understanding Characteristics of Public Opinion

Investors need to understand public opinion.  We have plenty of information from polls, but how can we use this to our advantage? This is a complex subject, which will be a major chapter in the book in progress that forms the basis for our work.

Our purpose here is to get the topic going with a few observations.  Each idea will be amplified and supported in future articles.  Let us start with these thoughts.

Characteristics of Public Opinion

It is a fundamental characteristic of the American democracy that people hold and express opinions.  It seems to be a lack of knowledge or citizenship to say, "no opinion" so polls register anything.  People love to opine about subjects that are shared by everyone.  It explains many reactions to political events.  Here are some examples:

• Sex scandals.  This is a staple of political information.  Since everyone has experience with sex, extra-marital affairs, and the like, opinions are all equal.  This explains why people are aggressive consumers of this information.  It makes sense to them.  Since mainstream media writers understand this, it is a natural subject.
• Family issues.   The current controversy about Governor Palin's daughter's pregnancy is typical.  This is something that everyone can understand.  Many have experienced a similar question.  Everyone has an opinion, and all opinions are equal.
• Government.  People love to criticize government.  Will Rogers made it a staple.  There is an interesting disparity, however.  For many years people have held Congress in low esteem while supporting their own Congressional Representative.  This is something we have followed for decades.  The responsibility does not transfer to one's own representative -- a disconnect between the macro and the micro, if you will.
• Economic circumstances.  People responding to polls give quite different answers when asked about their own situation and that facing the nation.  The former reflects what they actually know.  The latter reflects what they read in the newspaper.

Some Interesting Evidence

Mark Perry of the University of Michigan does some great work on this topic reported on his blog, Carpe Diem.  He recently noted an important disparity in public opinion on the economy, and he cited some good evidence.  Mark writes as follows:

But here's the bad news for the dour Democrats in Denver -- most Americans don't share their economic pessimism. That's the finding of public opinion expert Karlyn Bowman of the American Enterprise Institute. "Most Americans are feeling pretty good about their jobs and their personal lives," she says after investigating the fine details of recent polls. Her report goes right to Mr. Gramm's concern about the gap between actual economic performance and the dreary negativity of politicians and the media.

What accounts for the gap between people's attitudes about their own lives and the economy in general? Bowman replies: "The relentless negativity of the media."

He goes on to cite data supporting this viewpoint from Stephen Moore, writing in the Wall Street Journal.

Our Take

We do not take a partisan political position.  We form opinions on the economy based upon evidence.  This is going to be difficult during political seasons, since every reader interprets information through the prism of campaign rhetoric.

Our mission is to get good investment returns regardless of which party or candidate succeeds.  We have political opinions, but put them aside when making investment decisions.

What we find valuable is any information that helps us to interpret sentiment and market reaction.  Our conclusion, based upon long experience, is that public opinion is good when describing personal circumstances and poor when reacting to news.  The average citizen either reads news on politics or the economy, or gets information from a more informed friend.  Public opinion is not a good indicator of general macro trends and certainly not a measure of actual economic indicators like inflation or economic growth.

Any investor who understands this can profit.  It is simply a case of knowing when to "fade" the general public sentiment.  After all, the average investor grossly underperforms the market.  What better indicator could you seek?

Disclosure: None

Comments

[wpdragon:]

"We do not take a partisan political position."

Hogwash. You just provided links to two of the biggest shills for a corrupt and failed Republican administration on the planet, and in the case of one, the most intentionally incorrect stats (and assumptions derived from those stats) that I have seen in many years of perusing the web.

Mark Perry and Steven Moore?

You have to be kidding me... why not just trot Karl Rove and Dick Cheney out here to give their take on how things are in this economy?

Oh, and throw in Kudlow, then you'll have your RNC connection.

2008 Sep 03 02:26 PM

[Jeff Miller:]

wp--

You are a bit too harsh in your inference about politics. I checked out a number of your comments, and you are the one with an agenda. Moreover, you have no idea - -none whatsoever -- whether I agree with your voting preference or not.

The reason is that I try to get information from a multitude of sources. Information first, conclusions later. Send me an email and we can discuss further offline.

I really want to encourage people to get the maximum information from all sources -- discounting for bias as needed.

Thanks again for a comment that (no doubt) reflects the feelings of many.

Best,

Jeff

2008 Sep 03 11:44 PM

[Steven Hansen:]

jeff....

i agree with you about listening to everyone and then making your decision about what to do. but this article does not do that. i support wpdragon's opinion. i assume you are a doctor of economics. could you please tell me what is going on here? recently all you doctors have been coming out of the woodwork blogging that there is nothing wrong with the economy, obama sucks, and mccain is the one. now you are quoting and backing up your articles by referencing the others.

what is the real story??

2008 Sep 04 05:52 AM