Simon Black on the Herd Mentality

Sovereign Man’s Simon Black writes 

In one of the most ill-timed columns ever written, Fortune Magazine published an article entitled “10 stocks to last the decade” on August 14, 2000.

The NASDAQ Composite Index was at 3849.69… and within days of the article being published, the index would begin a ruthless decline, taking a whopping 13 years to return to that level.

And as for the 10 stocks which were supposed to last the decade? Two of them (Nortel, Enron) went bust entirely.

One of them (Morgan Stanley) would have gone bust if it hadn’t been for a $107 BILLION taxpayer bailout.

Others (Univision, Genentech) were bought out at valuations substantially lower than their August 2000 levels.

The remaining ones (like Nokia) are still out there somewhere, but their stock prices have declined as much as 83% over the last fourteen years.

To put it bluntly, not a single company on Fortune’s list of titanic, unbeatable stocks managed to generate a positive return for investors. Everyone lost.

In fairness, this isn’t a dig against Fortune; nearly EVERYONE thought that Enron was a sure bet back in 2000. (Although Fortune actually named Enron “America’s most innovative company” for six years in a row from ’96 to ’01…)

Back then no one could imagine that Enron and Nortel would soon cease to exist. Or that Nokia’s brand value would be virtually wiped out by Steve Jobs and a bunch of scrappy Koreans.

This is really a fantastic example of how a herd mentality forms about the sanctity and staying power of certain institutions.

It’s human nature to believe that whoever is in the lead now will always be in the lead.

This is a lucid example of the cognitive bias called anchoring or via Wikipedia the “common human tendency to rely too heavily on the first piece of information offered (the "anchor") when making decisions.”

Such indeed plagues the consensus who sees things moving on a linear or quasi-linear basis. 

And this goes with experts who relies mainly on statistics (economic history) as basis for crystal ball reading. 

When a trend emerges which are usually formed by first movers, this will be taken up gradually by more and more people which reinforce trend. Eventually convictions become so strong that most believe that a such trend can only move into a single direction. Such trend has been discerned as the risk free easy money trade that will be rationalized through various statistics. The upside movement accelerates.

At the day, as history always show, popular delusions will be dealt by reality in an agonizing way.