Listen to the Market Crowd
Barton Biggs will be sorely missed. I am writing this review mainly on one of the chapters in his book, "Wealth, War and Wisdom", that I found the most insightful: Chapter 1 - Listen to the Market Crowd
One of Biggs' central ideas is that the price action in the stock markets of the US, Britain, Germany and Japan called key turning points in World War II more accurately than the prevailing conventional wisdom generally held by the public, press and experts.
Do investors have any special insight? Aren't they driven just as much by general sentiment as everybody else? What about the "madness of crowds"? Charles Mackay wrote: "Men, it has been well said, think in herds. It will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."
Doesn't it pay to be a contrarian, to be ahead of the curve, to enter investments before the crowd and exit as they finally pile in? Maybe, but this chapter explains why we should be respectful of the collective judgment of the market crowd. Bear in mind, George Soros thinks of himself as a "contra-contrarian".
So what about experts? Experts have different incentives. Would talking heads be interesting if they mostly admitted their views were in line? Perhaps in fear of being called out for flip-flopping, many suffer from "cognitive dissonance", rejecting evidence against and emphasizing supportive arguments.
So why do markets outperform experts? Better estimates usually come from collective, aggregate views of diverse, independent, motivated people. It works best when there are strong incentives to be right. Social science calls this "a complex adaptive system". Obviously, the market is financially incentivized. Again, pundits have different incentives (publicity, etc.). Misjudgments of investors effectively cancel themselves out, leaving the more accurate group knowledge. A good example is the superior track record in election forecasting of betting markets over polls and pundits.
But differentiate Groupthink vs. Crowdthink. Participants must be diverse, have independent judgment and have skin in the game. With consensus investing, much value is lost because of hierarchy, a lower level of responsibility assigned to group participants, and mistakes on both sides of a call not having adequate chances to cancel out to leave a more considered or neutral if appropriate decision. Also, contrast individual (single investor, stock or sector) irrationality to (aggregate) market irrationality.
In sum, the main takeaway of Chapter 1 is - that at the macro level - LISTEN TO THE MARKET. On average, the wisdom of crowds will come up with a better answer than single individuals.
As an after-thought, apparently legendary stock picker Julian Robertson is at odds with this type of idea. In the book, "Inside the House of Money", Dwight Anderson quotes Robertson as hating the expression, "The market is telling me", and retorting, "The market isn't telling you anything - how come it's never talked to me?"
The rest of "Wealth, War and Wisdom" is about how various forms of wealth performed during the Second World War. It's certainly interesting reading, and a must read for those slightly paranoid - perhaps rightly so - about the state of world affairs. So much wealth can be easily wiped out by war, but thankfully, this book offers some ideas how to protect oneself should this kind of disaster strike again.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.