Beat the Crowd. Kenneth Fisher

or logging and milling, harvest time is harvest time. It comes once a year.

      Go back to the dawn of markets, and most American employment was in agriculture. Manufacturing was tiny, and service was scant. You had merchants and banks, but not the huge service industries of today. Agriculture dominated and so did its mindset – so we applied calendars to everything with rigor. Survival depended on it. It evolved into our core. Those who didn’t failed to pass their genes on.

      Breaking free of Wall Street’s love of calendars helps you think differently. Calendar-year returns aren’t important. Whether a bull market lasts two years or 10 years, that’s important! Returns in each of those calendar years, not so much. The overall return, net of all the corrections and pullbacks, is what gets you to your goals. If you measured market returns in rolling 14-month periods instead of rolling 12-month segments, it would be just as valid.

      Professional Groupthink

      Professional forecasters tend to fall into groupthink. They’ll never admit it! They all swear their views are unique, smarter, superior. Some surely are. Yet professional forecasts have a remarkable tendency to cluster.

      There are always outliers. Usually a few pros get it right each year, whether they’re right for the right reasons or just plain lucky. But the bulk tend to fall in a pretty tight range, giving the market (The Great Humiliator) an easy target – a big chunk of experts to humiliate in one fell swoop, what TGH “discounts” into current prices.

      The pros don’t deliberately cluster, per se. But they all use the same information, and they tend to interpret it in similar ways. What they agree on – the consensus – is the crowd, the herd or whatever you want to call what the market discounts in pricing and what the contrarian must avoid. Fundamentalists all look at the same Federal Reserve policies, economic pluses and minuses, interest rates, valuations and politics, and they all make the same assumptions about what’s good and what’s bad for stocks – and most are pretty, well, conventional, one way or another. They all have the same tendency to mean-revert – betting on the long-term average by assuming small or down years follow big years. The technical analysts all use the same charts, patterns and rule sets. It’s all the same widely known information the rest of the herd chews over daily. Dow Theorists follow Dow Theory. Those following Robert Shiller share the same broad interpretation of the wonky smoothed 10-year price-to-earnings (P/E) ratio he spearheaded (aka CAPE – Cyclically Adjusted P/E).

      As a result, everything the pros agree on is priced. Their expectations for how events and developments will impact stocks? Priced! Perceived risks discussed in reports and articles? Priced! Market reality is exceedingly unlikely to occur as they expect. Even if certain events follow their predictions to a T, the market reaction probably won’t.

      Contrarians get this. They know most investors will share the pros’ expectations. The media reports professional forecasts far and wide, and that influences most folks’ outlooks. Investing-as-a-science folks will often agree with the gurus who use similar methodology, logic and theory. Technicians usually side with the pros who use the same chart patterns and rules. Contrarians also know the curmudgeons will expect the opposite direction.

      How the Contrarian Uses Professional Forecasts

      Contrarians know the bulk of professional forecasts are priced. Won’t happen. But what, exactly, is priced? The actual number? If the consensus says 6 %, would TGH hit them with 8 %?

      It might. But probably not! Wouldn’t be nearly fun enough!

      Here’s the secret: The actual number isn’t so important. Markets look more at the general bucket. A 6 % forecast is really just a prediction for returns somewhere in the low to mid-single digits. The difference between a 6 % and 8 % forecast largely is without meaning. If that’s where the bulk of professional forecasts fall, that’s your clue the market probably won’t land in that bucket. It might! TGH might decide to attack the curmudgeon anti-herd instead of the main herd – it has before (we’ll get to that). But more often than not, the market will end up doing something very different than what the bulk of professional forecasters expect.

      Tracking the pros is easier than you think. Just takes some Googling and basic Excel work – and if you don’t know Excel, you can Google that too! (One of the Internet’s many miracles is its vast volume of technical tutorials.)

      So with minimal time and perseverance, you can do what we do at my firm. Though I warn you, few readers ever will because it is counter-sensical. Every year, my firm’s Research staff rounds up all the professional forecasts for major countries’ benchmark indexes – S&P 500 for the US, DAX for Germany, Nikkei for Japan. You get the gist. For each country, we throw all the numbers into a simple chart. Histogram, if you want to get technical.

      On the horizontal axis, we break the return spectrum down into 5 % ranges: 0 % to 5 %, 5 % to 10 %, 10 % to 15 % and so on. Then, in each range, we stack up every forecast that lands in it. It’s like stacking Lego bricks with numbers on them.

      What you usually end up with is a bell curve formation, with the fat part showing you the range where forecasts are most tightly clustered. If forecasts are clustered in the 0 % to 5 % and 5 % to 10 % ranges, that tells you most folks think markets will be up a little bit – single digits. Again, differences without distinction. If they’re all in the low negative and low positive single digits, you know most expect a flattish year. If they’re in the 10 % to 20 % brackets, folks expect a decent bull year. And if they’re in the –10 % to –20 % range, most expect a bear market.

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      “Investor Sentiment and Stock Returns,” Kenneth L. Fisher and Meir Statman, Financial Analysts Journal, March/April 2000.