The Simultaneous Wisdom/Madness of Crowds

by Wayne Ferbert on April 25th, 2012

You may sometimes hear about a particular trade or investment being ‘crowded’. ‘Crowded’ means that a lot of people have poured in to the trade of late – and is often considered a sign that the trade is near the end of its profitable run.

In my investing experience, the crowded trade rarely is the right trade – though multiple examples to the contrary come to mind (see: Apple - AAPL). On Sunday, Barrons posted its semi-annual Big Money survey. It surveys 125 top money managers on their views on the markets and economy.

Here are the results. Frankly, these results scare me because I agree with so much of it.
The group really likes Technology – just like we do at Buy & Hedge. I worry that this is a signal of the crowded trade. The group is heavily bearish on Treasuries – as we are at Buy & Hedge. In fact, the bearish bias is very strong: 81% bearish vs. 2% bullish. That is a lopsided market if ever I saw one.

I am a little heartened by the fact that the market seems mixed on Financials. Many think it is poised to out-perform but it also has a strong bearish sentiment. That is what it takes to make a market. It takes two sides with opposing views. The same can be said for Energy – which is mixed in the view of the money managers. We also like Energy at Buy & Hedge.

I would prefer to look at these results and see significant difference between what I think and what they think. It makes me wonder obviously – am I just part of the crowd in the Technology and the Treasuries trade? Or am I just a product of the market mass media? In other words, do I like these areas because the rest of the market likes them and talks about them most often? Or is the crowd right? That is the conclusion that is hardest for me to accept.

All I know for sure is that I am glad that my positions are all hedged with options – particularly in the most crowded of trades.

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