The Opposite of the Crowd

More than one successful investor has advised to observe what everyone believes and do the opposite.  When people are optimistic, be a pessimist.  When people are pessimistic, be an optimist.  When confidence is high and prices are rising, sell.  When confidence is low and everyone is running for the hills, buy with confidence.

I was considering this advice and trying to decide what the current sentiment is.  Are people optimistic or pessimistic?  Are they buying or selling?  I can recall a few epochs in my life where it was very clear.  In the ’90’s everyone was elated about tech investments and day-trading was everywhere.  Then the bubble popped and things cooled down as people become cynical about software companies and the internet.  In the early-mid 2000’s optimism was everywhere again.  The Dow would only ever go up.  Houses were a can’t-lose proposition.  Everyone became a real-estate speculator with pride. After ’08 there was a period of pessimism, but it didn’t seem to last all that long.

For the last several years it’s hard to identify clear optimism or pessimism.  There are a few sectors – like Silicon Valley and the VC world – that seem to be flying high, but overall there is a lot of indecision and indifference.  If you were trying to do the opposite of the crowd right now, it’d be pretty hard to discern what to do.  Everyone is cautious and confused.

Rather than thinking only in terms of pessimism and optimism we can broaden our lens and possibly identify an answer.  To behave opposite an indecisive crowd is to be decisive.  Now is the time to be definite.  Now is not the time for waffling and over-analysis.  Identify an opportunity, develop a theory, and act on it with definite purpose.  In this environment the consequences of failure are not all that bad, and there is a huge competitive advantage to decisive action because hardly anyone is taking it.

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