Successful Investing in a Market Dominated by Groupthink

Mainstream thinking tends to produce mainstream results. The outliers of human behavior and consequence – for better or for worse – tend to reside outside of the mainstream…out on the thin tails of the probability curve.

Out on those distant tails, you might find the creative genius of a Bill Gates or a Thomas Edison…or of that Chinese guy who invented gunpowder. On the other side of the curve, you might find the incomprehensible perspective of a Pol Pot or a Hernando Cortes…or of that woman who underwent 31 operations over 14 years so that she could look like “Barbie.”

Then, occasionally, you find those individuals like Vincent van Gogh who were so idiosyncratic that you can’t really say which thin tail they would occupy.

But, by definition, most of us live our lives where most of us live our lives – i.e., somewhere near the mainstream. That’s mostly a good thing. It is safe, comfortable, and conducive to a lengthy and well socialized existence. Out on the Serengeti, for example, the “outliers” usually become lunch…or if they’re lucky, dinner, a little later in the day.

But mainstream thinking and mainstream behavior also possesses a very dark side. It lacks insight. It shuns self-examination. It repels intellectual honesty and creativity. Mainstream thinking, therefore, can sometimes nurture more detritus than a petri dish; more dysfunction than a sanitarium. In Ages past, mainstream thinking has nurtured idiocies as innocuous as the periwig or as horrific as the virgin sacrifice.

In 1923, Sir Winston Churchill rebuked one particularly horrific manifestation of the mainstream thinking of his day:

“Accusing as I do without exception all the great Allied offensives of 1914, 1916 and 1917, as needless and wrongly conceived operations of infinite cost, I am bound to reply to the question – What else could have been done?

“And I answer it, pointing to the Battle of Cambrai, ‘This could have been done.’ [I.e., using tanks and other armored vehicles]. This in many variants, this in larger and better forms ought to have been done, if only generals had not been content to fight machine-gun bullets with the breasts of gallant men, and think this was waging war.”

Nearly one century later, many generals of many armies remain just as content as ever to fight machine-gun bullets with the breasts of gallant men. We here in the West believe ourselves to be slightly more enlightened. Maybe we are; or maybe today’s generals simply confuse hi-tech weaponry and body armor with “strategy.” Maybe they confuse “safer” with “safe”…while also confusing “can” with “should.”

But one fact is indisputable: No matter how sophisticated the weaponry and armor, inside the uniform you will still find a man or woman with a life to lose. A second fact is also indisputable: An unarmed 18-year old who watches TV in his living room – without a scrap of body armor, mind you – tends to live longer than his fully armed, and amply protected counterparts on a battlefield.

Over in the financial battlefield, a similarly dangerous form of mainstream thought tends to dominate. “You can’t really know the future,” the financial mainstream insists, “so the best bet is just to charge ahead. Buy and hold!”

These generals direct their troops to lock and load and charge the hill. Don’t worry about the barrage of risks that might blow bigger holes in your net worth than a rocket through a Humvee. Your best protection is just to diversify and charge ahead.

This advice is, of course, hogwash. Diversification provides very little protection when the bullets start flying. In fact, as the events of 2008 made very clear, diversification merely adds to the diversity of casualties on the battlefield.

The safest course of action is to avoid the battlefield entirely. But of course, that course of action never wins a war. The second best course of action is to ignore the generals. Avoid mainstream thought. Avoid the tyranny of groupthink. Edge toward the thin tails of investment guidance and thinking. And don’t be afraid to admit that black is black or that white is white.

Here’s a tip: If something looks risky, it probably is. Here’s another tip: if someone’s investment outlook seems illogical, it probably is.

If you study the ingredients that produce the success of the world’s best investors, you usually find one or more of the following traits:

1. Patience. They are neither afraid of doing nothing, nor afraid of waiting for the positive outcome they anticipate.

2. Selectivity. They never buy “the market.” They always buy specific opportunities that offer a specific risk-versus-return profile.

3. Independence. Mainstream thought is of no consequence to them.

Fortunately for most of us, investment success does not require extraordinary genius, but it does require contempt for mainstream advice and groupthink.

Eric Fry
for The Daily Reckoning