Investing

The curse of popularity

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ashions are fickle.

Until the 20th Century, prisoners, servants and pets used to eat lobster three or four times a week. It was nothing special, they were dubbed “cockroaches of the sea”, lay in two-foot high piles along the Northeast Coast of America and were sold in supermarkets for less than a can of baked beans.

Then, as railways began to spread throughout the U.S., entrepreneurial train conductors realised they could buy lobsters cheaply and serve them to unsuspecting passengers, who didn’t live close to the coast, as if they were exotic and rare.

Amazingly, passengers found them delicious and many began to ask for lobster once they disembarked. Chefs caught on, and by the late 1920s, prices peaked as supply began to dwindle.

That is, until the great depression, when no-one could afford luxury lobsters anymore. Prices sunk, the mystique wore off, and they were given to American troops, holed up in French trenches during World War II, as a cheap source of protein.

They’ve since made it back to celebrity status but their yo-yo ride of popularity teaches us a lot about the nature of stock markets and investors.

If you’ve never seen a lobster, and I serve you one while describing it as a ‘cockroach’, chances are you won’t enjoy it. But, if I call it exotic and make it appealing, chances are you’ll find it delicious.

Gestures, words and pictures prime us to act in a certain way, often without us knowing. A rising market or investment is a classic example. We take it as proof it’s destined to keep rising, the wisdom of crowds has anointed it so. And when markets begin to fall, the opposite applies.

When it comes to money, the problem with using crowds as evidence of accuracy is that opportunity is almost always inversely related to popularity.

Which is why the world’s most famous investor, Warren Buffett, tells people to “be fearful when others are greedy and greedy when others are fearful.”

But, like most things financial, it’s easier said than done. Just ask Sir Isaac Newton.

Newton invested in the South Sea Company, which rose from £128 to £1050 in early 1720. But sensing the speculative nature of the move, he sold his £7000 worth of stock and commented that he could “calculate the motions of the heavenly bodies, but not the madness of the people”.

And he was right. By September that year, the bubble burst and the company’s shares fell 80% from their peak. However, in spite of what he said, Newton’s urges got the better of him. It turned out, as the shares continued to rise, he bought back in, and bought more than before. So when they the shares fell back to earth, he lost £20,000, or £2.3 million in today’s money.

Investing isn’t about what you know, or how smart you are, it’s about how you control your instincts. As social creatures, we’re drawn to what’s popular, but in markets, popularity and profitability are the same poles of different magnets. They repel each other.

April 2, 2021
by 
Dom
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