“The fact that an opinion has been widely held is no evidence that it is not entirely absurd; indeed, in view of the silliness of the majority of mankind, a widespread belief is more likely to be foolish than sensible.” Bertrand Russell
So why does the crowd always get it wrong? The majority lose because most investors
are followers, not leaders. Investors wait until they see other people buying, and
they wait until they see other people selling. As a result, most people buy after
prices have already risen and sell after prices have already fallen. By chasing
the crowd, the typical investor loses twice over, he buys too high and sells too low. When people get caught up in a crowd, they stop thinking rationally and allow
themselves to be governed almost entirely by emotions. This state of mind prevails
at almost all market tops and bottoms. During these moments of mass delusion,
the crown extrapolates the current trend too far. As Humphrey Neil point out:
“A crowd never reasons but follows its emotions, it accepts without proof what is
suggested or asserted.” The long-term component of market prices becomes grossly, irrationally exaggerated. Ultimately economic reality takes hold and prices return to more realistic levels. In the interim, however, the lunatics have taken over the asylum. “When everyone thinks alike, everyone is likely to be wrong.” Humphrey Neil Consider the following: investors buy because they expect the market to go up, and they sell because they expect the market to go down. However, if everyone in the market place is looking to go up (a consensus), the consensus that everyone who is going to buy has already bought, so who is left to bid prices up? The same obviously applies in a falling market. In a free market you will never get a 100%
agreement, however, the closer it is to a consensus the more likely the majority is
badly mistaken. When a virtually unanimous, emotionally charged majority appears, it is almost certain to be wrong. An important point to remember is contrarians do not argue the majority is wrong. The majority is often right about long-term primary trends all contrarians argue is that the crowd suffers, mass delusions and extrapolates the trend too far. As Humphrey Neil says to the question “Is the public always wrong?” “The answer is decidedly no. The public is right more times than not. In stock market parlance, the public is right during the trends and wrong at both ends.” It is at both ends we will use the theory of contrary opinion to enter the market for maximum protability.
