Crowd Control

Don’t follow the crowd.

Not if you want good investment returns. There are times when an investment mania sweeps through the market, lifting anything with a particular niche or name. The internet boom of the late ‘90s was one such time, as was the biotech boom of the late ‘80s, and, recently, the mobile-social-web 2.0 boom, where companies like Twitter or LinkedIn have nosebleed valuations. These levels rarely last.

Conversely the mob can turn on sound stocks and depress their valuations just because they have the wrong name or are part of the wrong sector. During the Gulf of Mexico BP oil spill, a publicly traded trust based on Alaskan North Slope oil saw its price fall simply because it had the wrong ticker: BPT. Similarly, a sub-prime auto-loan company fell 90% during the financial crisis because it made sub-prime loans—on cars. It’s collateral was sound. It just worked in an unattractive sector.

Shakespeare wrote about mob violence. In Julius Caesar, Marc Anthony uses his funeral oration to incite the crowd against Brutus and Caesar’s other murderers. In the next scene, as the audience swarms through the streets, they come upon a man named Cinna—the same as one of the conspirators. “Tear him to pieces!” they rage. As he’s carried off, he shouts, “I’m not a conspirator. I am Cinna the Poet!” “Tear him for his bad verses,” they respond. When the hoard is out for blood, facts don’t matter.

When crowds get excited, watch out. What starts with enthusiasm frequently ends in tears. Crowded trades are rarely profitable trades.

Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
Leave a comment if you have any questions—I read them all!

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