The notion of buying low and selling high is easy in thought and hard in practice. Success breeds ego and misery loves company. So when we're all buying, we're all bragging, and when we're all selling we're all crying together. This demonstrates extreme thought and behavior. We're more comfortable doing what other people are doing - perhaps even not in our own interest.
For example, investors are currently willing to accept - 5% inflation-adjusted real returns in exchange for the illusion of safety. This demonstration of extreme fear is a result of billions of dollars chasing the protection of short-term government t-bills. They believe by doing this their cash will retain it's value, when in fact it is losing value at the rate of inflation. That's because the herd rush into the perceived safety of the t-bill, has pushed it's yield down next to nothing. This is clearly irrational, yet many people seem compulsively drawn together to do this. There is comfort in a crowd - it is easier to be wrong along with everybody else, than it is to stand alone.
On the other extreme, millions of investors bought billions of dollars worth of preferred stocks at $25 per share. When issued, most of those preferred stocks paid dividend yields in the 5-8% range generally. Now those same investors are selling those $25 preferred issues, in many instances at prices ranging from $5 to $15 dollars per share. Some of these lower priced issues pay current yields ranging from 15-25%. That equates to 10-20% after inflation. Additionally, the issuing companies cannot redeem these shares for less than $25 per share. And many of these are investment grade rated. This is obviously the other extreme of the treasury bill example. Though the official quality of these preferred stocks is high, the emotional quality has diminished greatly due to group fear. Crises for the herd equals opportunity for the individual. The wolf standing at the edge of the pack only needs one calf every now and then to do quite well.
What this means, is that if you pay close attention to any one particular area of finance, or by extension politics, or human behavior, you can often see what other people can't see. As in the above examples, a shrewd investor can take advantage of what is a clear opportunity for potentially exceptional returns. He must however use logic and rational thought to overcome the fear that has engulfed the herd of investors. Again, easier said than done.
This can be also observed in politics, in the shallow adulation of the questionably charismatic presidential candidate Barack Obama. As if infected by the flu, many people only favor Obama because they caught the bug. It is easier for them to do what the herd is doing, than to personally investigate the man, his issues, and whether they agree with their own. Unlike the investor, the astute contrarian can do nothing to take advantage of the situation. There is no arbitrage available, politically speaking, and he will subsumed by the greater herd. He is at the mercy of the crowd.
It's usually better not to run with the herd, unless you're a cow.
TimMoore
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