In one of his great papers on the ten attributes of great investors, Michael Mauboussin writes that “investing is an inherently social exercise” (“Thirty Years: Reflections on the Ten Attributes of Great Investors, Michael J. Mauboussin, Dan Callahan, Darius Majd, Credit Suisse, August 4, 2016).
That’s both fact and warning. The fact is that investing cannot be done in a vacuum without other people. The warning is that, like other social exercises, investing exposes one to the thinking and behavior of others – and that sometimes can be detrimental.
As an example, think of the internet stock bubble in the late 1990s, when soaring stock prices convinced many people to buy in without thinking carefully for themselves.
Mauboussin likens that situation to the work Stanford sociologist Mark Granovetter did on how riots get started. It may be that one person throws a brick through a window. Afterwards, each additional person joins in according to his or her threshold for jumping into mayhem. For one individual, that threshold may be seeing five others join in. For another, it may be seeing 20 others. Granovetter writes, “The cost to an individual of joining a riot declines as riot size increases, since the probability of being apprehended is smaller the larger the number involved.” And yet individually, very few would think that rioting is a good idea.
We all become susceptible to collective behavior after a certain threshold is reached. In his paper on riots, Granovetter lists several situations that ring true: If you hear a rumor once, you may disregard it, but if you hear it from enough different people, you may spread the rumor too. You may join a strike only after you see that a certain number of people already have committed to striking. You may not adopt a new technology until you see that a certain number of people already have. Or you may decide to leave a party only when enough others have already left and made it acceptable for you to leave too.
But investing should never be one of these situations. We should never have to see a threshold of “x” number of people buying a stock before we decide to buy it too.
Perhaps that’s why it’s so disturbing that James Montier noted recently that more fund managers than ever believe that stocks are “excessively valued,” and yet, they still keep overweight positions in stocks. That’s according to a recent Bank of America ML survey.
Montier calls it a “cynical bubble” (“The Advent of a Cynical Bubble,” James Montier, GMO, February 2018). That is, not only are fund managers buying stocks because everyone else is, but they’re also fully aware they’re doing so when stocks are expensive. Montier calls them “fully-invested bears.” And if we’ve really reached that point, it’s cynical indeed.
So let’s step back and remember what Mauboussin writes about great investors. One of the attributes of great investors, he says, is that they know the difference between information and influence. Great investors are never pushed into buying something they don’t value fundamentally. They “don’t get sucked into the vortex of influence.” They don’t care what other people think about them. In fact, they have “a blatant disregard for the views of others.” And as awful as that sounds for polite society, it’s a valuable trait for investors – and a rare one too.
Please note: The 2-Minute Thought will be on break for two weeks and return March 29.