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Wednesday, February 6, 2013

When Too Many Think Alike




"As a general rule, it is foolish to do just what other people are doing, because there are almost sure to be too many people doing the same thing."
   -- William Stanley Jevons (1835-1882)
One of the sure-fire ways to financial failure is conformity. There is nothing more damaging then following the crowd. For the most part the crowd is listening to someone else who is listening to the crowd. It is a vicious cycle that ends with a death spiral.
The economic climate we now live in is a highly evolutionary vehicle. Gone are the ties to the past and the trends that were in existence for the last 100 years. This is not a bump in the road which ends with everything happily and comfortably returning to “normal”; there is a new normal being created. It is a source of dramatic change with new rules and new patterns and trends.
The simple facts are those so-called experts are out of their depth as they have now become novices along with everyone else in this new age of geo-political driven economic events. The financial markets are being re-created and this requires all investors and consumers to become counter-intuitive in their thought processes. The financial decision making process that may have served you well in the past has been made meaningless into the future.
There are many dangerous myths built into your financial decision making process, we already covered the normalcy bias and the magic silver bullet syndrome, now you must confront the conformity of “everything old will be new again.”
"In speculation, as in most other things, one individual derives confidence from another. Such a one purchases or sells, not because he has had any really accurate information...but because some else has done so before him"
-- J.R. McCulloch 1830
The following is a story that best clarifies what is happening in the financial markets today:
Everyone has had a taste of success. The explanation for it all is "the world is awash in liquidity". Everyone is also feeling rather complacent & secure. It reminds one of the Red Indians....
"It was autumn, and the Red Indians on the remote reservation asked their new Chief if the winter was going to be cold or mild. Since he was a Red Indian Chief in a modern society, he had never been taught the old secrets, and when he looked at the sky, he couldn't tell what the weather was going to be. Nevertheless, to be on the safe side, he replied to his tribe that the winter was indeed going to be cold and that the members of the village should collect wood to be prepared. But also being a practical leader, after several days he got an idea.
He went to the phone booth, called the National Weather Service and asked "Is the coming winter going to be cold?" "It looks like this winter is going to be quite cold indeed," the meteorologist at the weather service responded. So the Chief went back to his people and told them to collect even more wood in order to be prepared. A week later, he called the National Weather Service again. "Is it going to be a very cold winter?" "Yes," the man at National Weather Service again replied, "It's definitely going to be a very cold winter."
The Chief again went back to his people and ordered them to collect every scrap of wood they could find. Two weeks later, he called the National Weather Service again.
"Are you absolutely sure that the winter is going to be very cold?" "Absolutely," the man replied. "It's going to be one of the coldest winters ever."
 
"How can you be so sure?" the Chief asked.
The weatherman replied, "The Red Indians are collecting wood like crazy."
Conformity in financial decisions leads to calamity!
 And, so the question is are you following “Red Indians” in the financial markets?

Karl Schilling
The Advocacy Network
321-250-1445 O
321-947-3220 C
Skype: karl.schilling5