The Stock Market : Can We Trust the Crowd?

by | May 20, 2008 | Asset Management

Do you remember the television program, “Who wants to be a Millionaire“?The show was actually featured in a terrific book “The Wisdom of Crowds” by James Suriowiecki. If you remember, the contestants were given three “lifelines” to help them. The first lifeline was the “50/50,” where two of the four possible answers were eliminated. So, you had a 50% chance of being right — even if you guessed.The second lifeline was “Phone a Friend” where the “smartest person they knew” would be standing by to help answer the question. The “Phone a Friend” option pulled a right answer 65% of the time. Ok, not bad, but still a 35% chance of getting a wrong answer — somewhat better than the 50/50 odds.The third option was “Poll the Audience,” where the studio audience had to vote for the correct response. The “Poll the Audience” results were incredible!They gave the correct response 91% of the time!Amazing! Now, this not a group of rocket scientists, or experts of any rank gathered together — this was a random crowd of people sitting in a television studio!How could they be so right?

While it’s certainly not a scientific experiment, it does point out that crowds DO seem to know more than individuals. And Surowiecki’s book gives example after stunning example of how crowds just seem to know more…and are more able to predict the proper outcome than the so-called experts.

Whoa, wait a second…

What if we change the name of “Phone a Friend” to “Watch the stock markets expert on TV,” or “read the financial wizards in the papers”? The “wizards of Wall Street” may sometimes be on target, but only somewhat better than a 50/50 guess, right?

And likewise, what if we change the name of “Poll the Audience” to “Ask the Stock Market” instead? Isn’t it true that the price of a stock will most often start to go up — or down — BEFORE the actual news comes out? So, if we polled the audience (those who are buying or selling a stock), you’ll often get an accurate picture of what’s unfolding — you just won’t have the reasons WHY a stock dropped until later.

Look, rather than waste time with “predictions” about where stocks, interest rates or the economy are heading, we should focus on what IS happening. The stock market is one gigantic polling machine. And it’s telling us — every single day — what’s in demand and what’s in supply.

So, OK, quiz time…
1. Something that has a lot demand, what happens to the price?
2. When there’s too much supply of something, what happens to the price?

And, finally, wouldn’t you agree — some stocks go up — even when experts predict they won’t — right? Wouldn’t it make sense to put our money into the sectors that are working now?

We have an emotion-free tool
that helps guide our investment decisions: the point and figure charts. These charts tell us the results — in real time — of the “audience polling.” The audience gets polled every day and we learn what’s in demand, what’s in supply, and make decisions accordingly.