Barton Biggs was a guru hedge fund manager and global investment strategist.
He was also a serious student of World War II. His book Wealth, War & Wisdom is about what happened to stock markets and wealth during WW2.
Today is part one of a two-part series on the takeaways from this book.
This is important because it was during a time he calls “the most excruciating, destructive global disaster in all history.”
You can learn a lot about how to build and preserve wealth during times of global chaos and destruction. Of course, things like that don’t happen often.
But the idea is to learn from history. That way you have the tools to increase your wealth in good times and most importantly, preserve your wealth during the worst of times.
The goal at The Champion Investor is to build wealth and pass it down through the family for decades or even centuries. Our timeline is forever. It’s easy to think like that when you think about building family wealth.
Here’s part I on my takeaways from Wealth, War & Wisdom…
“Listen to the Market Crowd”
This is the opposite of nearly every investment book out there. Heck, I even talk about how important it is to ignore the crowd or herd too.
But there’s a deeper meaning to it.
Biggs wrote, “it has become very fashionable to be a contrarian.” You need to be what another legendary investor, George Soros, calls a “contra-contrarian.”
We can ignore the crowd or herd… But we should still “listen” to what the crowd is telling us.
Biggs again… “When asked or required to make judgements independently and in a rational way, the record of crowds is impressive.”
Here’s some interesting evidence from WW2…
- The London stock market predicted Britain would win the Battle of Britain.
- The German stock market peaked as the German army could “see the spires of Moscow.” (The Russians crushed the German army shortly after.)
- The NYSE knew that the victories of Coral Sea and Midway were “the turn of the tide in the Pacific and never looked back from the lows.”
This goes back to the analysis I talked about yesterday… The importance of understanding price and value.
You see, experts sit around and talk about the markets with other experts. They hang out in the same groups and go to the same global conferences and private clubs.
This is group think.
It’s less wise than a group of random individuals or crowd think.
Biggs pointed out that author Philip Tetlock said, “Expert opinion on politics, economics, and business should be ignored as random blather because experts are even less accurate than non-specialists in guessing what is going to happen.”
Biggs also cited a study that showed 284 experts who made 82,361 forecasts over a period of years were right less than half the time and that they were worse than “dart-throwing monkeys.”
He then pointed out that the famous Austrian economist, Friedrich Hayek, argued that central planning could never be as economically efficient as the price mechanism. Because it’s impossible to know all the information and decision making of humans scattered around the country.
The power behind the price mechanism is decentralization. This decentralization IS THE WISDOM OF THE CROWDS.
The bigger the crowd the more decentralized it is. (Side note… This contrasts with mobs or small groups of people who participate in group think as explained above.)
Biggs again…
“Markets are a complex adaptive system. Individual agents will provide little or no worthwhile help on the workings or the course of the market…
Therefore, it is so important to listen to the market. At crucial turning points, observe what markets do and ignore what the experts and the commentators say about what is going on.”
By the way… This doesn’t mean that markets can avoid bubbles, frauds, and panics. People can be irrational. (Just spend a few minutes watching YouTube or Facebook (NASDAQ:FB) videos. You’ll find out how irrational people can be.)
But over the long term, Biggs says the market is generally rational.
OK… What does this mean?
It means that “listening to the market crowd” is one way to understand price and value. It also means asking yourself a lot of questions.
For example, why is the stock market at all-time highs? You can’t just assume that a major correction is looming or it’s a sign of the next great depression.
You also can’t just assume that things will get better if the market is at decade lows. Look deeper.
Think about price and value. Listen to the power behind the price mechanism… The crowd.
For example, as part of understanding the big economic picture, an investor could look at the percentage of new highs or new lows in the stock market.
Or look at the ratio of gold to the S&P 500 like we did a few days ago. Or look at the technical indicators of the S&P 500 Index or Dow Jones Industrial Average.
A picture is worth a thousand words. So is a chart. It’s a picture the crowd has painted for us. Think of it like looking at a piece of art work.
In an art museum, we may ask ourselves things like… Is the composition asymmetrical? Is balance achieved? Is there a focal point?
Are there any parts of an object or figure out of proportion to the rest? Are shadows visible? Are the lines horizontal or circular?
How does all of this influence my response to it?
Find confirmation from the “market crowd.” Understand what’s driving the stock market.
Biggs said, “Every mania stems from some degree of substance in a life-changing development whether it was railroads in the nineteenth century or technology in the waning moments of the twentieth century…
In retrospect, even in 2000 there was some rationality in the market as a whole. Tech and internet growth stocks were selling at ludicrous valuations, but other major value segments of the market that were out of favor were ridiculously underpriced.”
Are we in the middle of a stock market mania? Is there a life-changing development out there right now like the railroads or the internet that may produce the next mania?
Is that life-changing development Bitcoin or the Blockchain?
Today’s not about answering those questions. It’s about learning the lesson of how important it is to listen to the crowd.
It’s not enough to be contrarian. You need to use the crowd to your advantage too.
It’s a little counterintuitive. But you’ve got to do it to be a successful investor.
Stay tuned for Part II tomorrow…