HERD MENTALITY

DynamicTrader.org/Nov 15 2008/       In today’s day and age, the most important socialnomics lesson is Herd Mentality. We simply can’t have enough of what the next individual is doing. The place to start to understand our affliction is in the stock markets.We simply can’t stop creating enough Bubbles.

The Subprime Crisis first made notoriety in August 2007, at a time when bullish indicators were already at the extreme. However, despite the subprime announcements and fears from industry veterans and hedge fund professionals (George Soros, Buffet, etc), the market defied all odds and continued to move to new highs. In October 2007, so bullish was the herd that they convinced the “best traders of all times to go long”. Temasek and various sovereign funds went long in the face of adversity, calling it a trade of a lifetime.

Here was a pattern emerging: “How the best traders of the world were making the worst trades of their times”. Similarly, this has happened before and always will – in end 1999, just by the DotCom Collapse, when Tiger’s Fund Julian Robertson, George Soros and even Value Warren Buffet went long tech stocks before their demise, after being short Nasdaq in general for three years in a row, this pattern of Herd Mentality is so strong that in 1998, the Monetary Authority of Singapore and Taiwan’s Central Bank publicly announced that they were moving most of their reserves from other currencies into US Dollars. This is when they initiated long carry Yen traders at 130/145 ranges just two weeks before the Great 20% Collapse in US/JY to 90 Yen per Dollar. So it isn’t surprising to note that this time around, they are caught on the wrong foot again.

It is this Herd Mentality that makes conservatives into extreme gun-slinging, risky, adventurous traders, and this change in perception is created by a very strong emotion known as greed. Society tends to create hidden benchmarks of expected performance from a fund/trader/investor/individual. This benchmark is usually driven by GREED or FEAR; fear of losing out to the next and greed of making more than the next. HOPE only kicks in when either of the perceptions go wrong. So in emotional studies, it would be that hope is the consolidating phase before the turn back into fear or greed.

Just as the markets are flirting around with the lows, a look at the charts of the DOW/SP/Nikkei or any of the world indices clearly demonstrates that consolidation is underway. We have not had significant lower low, lower highs for the past three weeks, but rather a swing up to the highs and a swing back down, on both sides. There is fear – fear of losing out a bottom, fear of not having enough cash during the down turn. Interestingly the market closed midway of the week, suggesting hope that the G20 and the weekend will bring about some relief.

Somehow it seems that the herd is dumb, stupid and has no mind of its own. Emotions run so strong that the animals don’t looks up and see the reason of running – they do not know the reasoning of the run. Is it to a slaughter house or towards greener pastures? One thing however is sure – the only way to profit from the markets is through contrarian approaches. In all probabilities, 80% of the time, results should end up favorably albeit at times after a prolonged wait. But the nearing turn always comes when the “best traders of all times initiate the worst trades of all times” and you don’t have to worry, they usually announce their trades with a Big Bang!

Recent Announcements:

  1. Fed Bailout 700B (BEARISH)
  2. Buffet says buy American (NEUTRAL)
  3. Jim Rogers, Long Commodities, China. Short US (Analyst view not fund)

Notes:

  • Of the above, it seems Jim has three options open and as usual, he will emerge in time to call his trades Right.
  • Fed changes plan of not investing in Toxic assets anymore. They seem to have seen the light!

Good luck investing!!!!

DTRADER