The Zurich Axioms By Max Gunther
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Never follow speculative fads. Often, the best time to buy something is when nobody else wants it.
The pressure of majority opinion is especially troublesome when it comes to the questions of what to invest in and when to invest. This is when many an otherwise clever speculator lets himself or herself be pushed around, with unprofitable results.
Take the stock market as an example. When is the best time to buy a stock? When the price is low, of course. And when is the best time to sell it? Why, when the price is high, naturally. Kids learn this in seventh-grade economics, and even if nobody ever taught it to them, they would figure it out for themselves.
What they don’t usually learn until adulthood is that this seemingly simple formula is amazingly difficult to put into practice. It is difficult, in large measure, because it requires the speculator to act against the pressure of popular opinion.
As a general rule, the price of a stock – or any other fluid priced speculative entity – falls when substantial numbers of people come to believe it isn’t worth buying. The more unappetizing they find it, the lower the price drops. Hence the great paradox that isn’t taught in seventh grade: the time to buy is precisely when the majority of people are saying, “Don’t!”
And he obverse is true when it comes time to sell. The price of a speculative entity rises when large numbers of buyers are clamoring for it. When everybody else is screaming, “Gimme!’ you should be standing quietly on the other side of the counter saying, “Gladly.”
Let’s look at a specific example. The automobile industry fell into a quagmire of highly publicized troubles at the beginning of this decade. The troubles were severe and, as far as anybody could tell, intractable. All of Detroit stared into a future that looked like the pit of hell. There was talk about widespread bankruptcies of auto makers and suppliers. Plant after plant shut down. Thousands of workers found themselves out on the streets without paychecks. In a desperate effort to conserve operating cash, might GM halved its stock dividend from 1979 to 1981, and in the following year Ford paid no dividend at all.
The majority opinion – all the way from Detroit’s union halls to the clubs and watering spots of Wall Street – was that the auto industry was in deep mud and wasn’t going to climb out for a long, long time. Anybody who bought auto stocks ought to have his or her head examined, the majority said. The stocks, unwanted, sank to dismal lows. You could buy GM common shares in 1981 and 1982 for $34 – as low as it had been in more than twenty years – and many pundits predicted it would go still lower. Ford’s stock (adjusting for a 3-for-2 split in 1983 could be had in those bad years for $11.
As it turned out, anybody who ignored the majority view in those years made out fine. GM Stock, buyable up to mid – 1982 for $34 or so, zoomed to $80 in 1983. Ford more than quadrupled, from $11 to $46 and a fraction.
The industry’s troubles had been shorter-lived than most people had thought possible. The speculators who made money out of the situation were those who disregarded what everybody else was saying and thought things through for themselves.
But it is notoriously hard to think ‘yes’ when everybody around you is shouting ‘no!’. Some speculators find this to be among their worst problems. Majorities are always dissuading them from carrying out good moves.
It happened to my wife during the auto-industry upheaval. A six-month CD of hers came due in early 1982. She had a hunch about Ford, which was then, as we’ve noted, deep in the mire. She liked Ford’s cars, kept hearing other women praising them and believed the weeping and teeth-gnashing from Detroit were caused partly by a seizure of self-pity and panic, which would soon go away. And so she talked to her broker about buying some Ford stock.
He laughed at her.
He was a man immersed to the ears in the majority opinion. He was able to document that opinion abundantly. Newspaper stories, analysts’ reports, and of course the low stock price itself – all sang together in a mighty chorus – “Don’t buy!”
So she didn’t. This was unusual for her. In most situations she is quite capable of thinking her way independently to her own conclusions. But in this cast the majority pressure was simple too intense to resist.
Majority pressure can not only dislodge a good hunch; it can even make us doubt ourselves when we know we’re right. They used to demonstrate this in the psychology department at Princeton University.
The experiment was unkind but startlingly effective. Eight or ten people would be assembled around a table. In the middle of the table were half a dozen pencils of assorted colors. All the pencils were precisely the same length except one. That one – we’ll say the red one – was clearly shorter than all the others.
The people around the table would be asked to vote on the lengths of the pencils. The majority – everybody but one baffled person – would express a clearly wrong opinion, one that argues with the evidence of the eyes. They would say that the pencils were all the same length.
The majority were coached and were in on the hoax, of course. They were all ringers except one. The object was to see how that one person would react.
In about one-third of the runs, the nonringer would undergo a moral collapse and go along with with the majority opinion.
Against the evidence lying plainly in view, he or she would squirm, fidget, sigh, and finally say yes, okay, I guess the rest of you are right, those pencils are all the same length.
Arguing with a majority is enormously hard. It is hard even when the debate deals with factual matters that can be verified by looking or measuring. It is vastly harder when the debate deals with questions of opinion that can’t be subjected to that kind of quick verification. Nearly all money-world questions are of the latter variety.
As far as I know, there is no mental muscle-building course that can strengthen your ability to withstand majority pressure. At dinner parties sometimes, I deliberately make myself a minority of one by expressing some dumb opinion that I know will start everybody else beating on me – ‘Nuclear war may be less horrid than those old-time wars where you got hacked with swords”, or some such nonsense. Trying to defend oneself against an enraged majority in a case like that is certainly stimulating. But whether it would strengthen you for the next time you want to buy a mired Ford, I don’t know.
Probably the best defense against majority pressure is the simple awareness of its existence and coercive power. Novice speculators often seem to lack this awareness. A novice can be bulldozed by a majority without even realizing it’s happening.
Thus, you will always find novices among the herds of people swept along by speculative fads. When gold is the the Speculation of the Month – when everybody is talking about it, every financial columnist furiously writing about it – that is when newborn speculators typically plunge in and buy. It is also when the price of gold is likely to be unnaturally high, but it seems to take people a long time to understand that. Similarly, when small capitalization high-tech companies are the hostsies of Wall Street – and when their share price are sky-high that is when the newborn line up to add their money to the pile that will one day go up in smoke.
The novice gets pushed around without feeling the push. He or she doesn’t stop to ask: “Am I making this decision because a majority says it’s smart?” That is a question Descartes would have asked. If he were to invest in gold or high-tech, he would have done so only for his own reasons, regardless of what the herd was doing or saying.
In your effort to resist the pressure of the herd, you will also be up against sales pressure from brokers and others who stand to profit from your speculative moves. These speculation service people, seeking their commissions and fees, naturally tend to push whatever is hot at the moment – whatever happens to be tickling the public fancy, whatever is high-priced. If you are an active speculator, you are always going to be bombarded with ads, sales talks, and other blandishments to buy whatever the majority is buying.
It isn’t that the speculation-service folks harbor a malicious wish to make you poor. On the contrary, they would rather see you rich – partly because that means potentially higher fees for them and partly because they’re human like the rest of us: they prefer being smiled at. Still, like anybody selling anything they must pay attention to what the public wants.
The public almost always wants gold during recessions, for example. The yellow metal is felt to be a lockbox of value in times when national economies, currencies, stock markets, and other money structures are developing-cracks and springing leaks. During a dark time such as the early 1980s, the price of gold tends to jump because large numbers of people are buying it.
As we’ve discussed, that is exactly the time when you should be the most cautious about doing the same. But it is also the time when the selling pressure for gold reaches its peak. In the early 1980s, newspapers were full of ads offering gold bullion coins, and medallions. Brokers touted the shares of gold-mining companies such as Homestake. Mutual funds specializing in gold-related investments sent out truckloads of prospectus and brochures. Advisory services offered reports on gold and prophecies about it. If you wanted to put your money into gold or any investment linked to the metal, all you had to do was place a toll-free phone call to any of dozen numbers, and a battery of happy operators would be waiting to take you order.
But by the end of 1983, when economic conditions were looking rosier and the price of gold was down, you had to hunt hard to find anybody who would sell you a gold medallion.
None of this means you should always automatically do what the majority isn’t doing. It means only that you should stubbornly resist majority pressure instead of just drifting along with it. Study each situation for yourself, process it through your own good brain. The chances are you will find the majority wrong, but that doesn’t happen always. If you determine that everybody else is right, then by all means march with the majority. The point is: whatever you do, whether you bet with the herd or against, think it through independently first.
There are speculators who make a dogma out of betting automatically against the majority. They call themselves contrary thinkers or contrarians. Their philosophy is derived from the paradox we’ve been looking at: that often the best time to buy something is the time when it seems the least attractive. Thus you will find contrarians doggedly buying gold on the sunny peak of a bloom, buying this or that school of paintings when everybody else is using them for freezer wrap.
The trouble with contrarians is that it starts with a good idea and then hardens it into a grandiose illusion of order. It is true that the best time to buy something may be when nobody else wants it. But to buy automatically and unthinkingly for that single reason – to buy solely because the entity is unwanted – seems almost so silly as to bet unthinkingly with the herd.
The herd isn’t always wrong. If the market value of Trashworthy’s art drops to 19 cents a square yard, that could be a good buying opportunity. On the other hand, perhaps the herd is right to shun these gummy expanses of oil paint. Maybe they will never be useful for anything but wrapping fish.
Almost everybody shunned Chrysler stock in the early years of the decade, and in my opinion quite rightly/ If it was risky back then to put one’s money into the low-priced GM or Ford shares, it was the craziest of gambles to buy Chrysler. The company had one foot in the grave. A bitterly debated loan from Uncle kept the gasping corporate wreck alive, but its long-term prognosis was bleak. The unwanted stock could be bought for three or four bucks a share through most of the period 1980-82. In making that unenthusiastic judgment about Chrysler, the herd was acknowledging an objective reality: the company’s chances of making a comeback were worse poor. Chrysler looked like a terminal case.
Today, of course, we can look back with the 20-20 vision of hindsight and see that the popular judgment was too pessimistic. Against all odds, Chrysler fought its way back to health. The stock was trading over $35 by the end of 1983. By buying it at its low a year and a half earlier, you could have tenfolded your money.
That still doesn’t change the fact that the stock, as seen from the viewpoint of 1981, was a long, long shot. The majority of speculators, in shunning it, were acting in a perfectly reasonable ways. Here was a case in which a contrarian’s kind of bet, automatically against the majority, would have seemed pretty foolhardy.
Here was a case, indeed, in which it might have seemed sensible to make an exception to Minor Axiom I, which counsels that one should always play for meaningful stakes. A bet on Chrysler up to mid-1982 would have been like buying a lottery ticket or entering a raffle. Figuring that the odds are a million to one against you, you wager a couple of bucks just for fun. If Congress had passed a law in 1981 requiring every taxpayer to invest in Chrysler, I would have bought one share.
Well, maybe a hundred. It is nice to dream about tenfolding one’s money in a year a half.
Speculative Strategy
The Tenth Axiom teaches that a majority, though not always and automatically wrong, is more likely to be wrong than right. Guard against betting unthinkingly either with the majority or against, but particularly the former. Figure everything out for yourself before putting your money at risk.
The greatest pressures on you , and the most frequently felt, will be those that push you into betting with the majority. Such march-with-the-crowd speculations, the Axiom warns, can be costly, for it is in their nature hat they tend to make you buy when prices are high and sell when they are low. The strongest line of resistance against these pressures is a keen awareness of their existence and insidious power.