The Madness of Crowds
A Good Stock to Hold
So, some lucky people in California, Florida and Tennessee are going to split a $1.8 billion jackpot. Good for them—maybe. But maybe not.
You see, by my count, there are two kinds of losers in the lottery.
The first are those who play and don’t win. That’s the fate of the vast majority of participants in lotteries these days, and it’s not such a bad fate (unless you’re betting the rent money.)
The second are those who win big. Yes! History is full of people who won millions in the lottery and ruined their lives. First, they lose their identity. Whatever defined and grounded them previously is suddenly overwhelmed by the sheer weight of millions of dollars. Then they lose their friends (and sometimes family), as the commonalities that held them together are disrupted by the money. Suddenly, everyone wants a handout, and relationships that were based on give-and-take—on reciprocity—quickly grow very one-sided.
And sometimes—there are the winners who were and remain big gamblers—they eventually lose all the money!
I know. Everyone who’s heard the horror stories says, “I’m different. I won’t let it ruin me.” Or they joke, “I’ll take that risk!” But the fact is, the dream that was shared by millions of people last week can easily turn into a real nightmare.
And that’s a problem that the original “losers”—meaning almost everyone else who played—are lucky to avoid.
Anyway, my real topic this week is a look at the crowd behavior that characterizes lottery participants.
The most curious aspect of this behavior is the fact that the bigger the payout, the more people are attracted to the lottery!
People who wouldn’t play when the jackpot was simply $100 million (as if that’s not enough money to change your life!) suddenly want to get in on the action when the jackpot swells to several times that size.
That’s totally irrational behavior. In fact, as the number of people playing grows, the odds that a winner will have to share the jackpot grow, too.
But people don’t think about that. Instead, they are blinded by big numbers, and overcome by the pressure of all the social cues that say “everyone’s doing it.” And they jump on the bandwagon.
The Powerball people actually understand this behavior quite well, which is why they decreased the odds of winning last year. They reasoned, quite correctly, that allowing the jackpot to grow bigger would get more media attention and draw in more players.
In fact, the behavior even has a name; it’s called Fear Of Missing Out, or FOMO.
And, no surprise, this behavior isn’t confined to lotteries; you can find it in politics, in sports, and, most relevantly, in the stock market.
In politics, you can see the way certain candidates (Donald Trump and Bernie Sanders in particular this time around) ride a wave of approval by people who actually know very little about the candidates or the issues. FOMO stimulates people to join movements, so they remain part of the “in crowd.”
The biggest example of FOMO in my memory occurred in the late-90s, when Internet stocks were going through the roof and everyone (including my barber and landscaper) wanted to talk about their “investments.”
In that market, when day trading became a “profession” anyone could get into, people who didn’t join in were seen to be missing out on the easy riches of the stock market.
Well, we all know how that ended.
Okay, enough with the lottery comparisons.
The point is, to be a successful investor, it’s important to think for yourself. Certainly, that often means recognizing what’s in and out of favor in the market as well as monitoring the movements of the mass majority.
But it doesn’t mean joining them.
So far in this young year, for example, a lot of people have been selling stocks, and the selling has accelerated as more and more people have joined the movement.
Nevertheless, there are very good reasons to hold onto stocks.
One is if you have large long-term gains and want to defer paying taxes on any capital gains.
Another is if your stock is still behaving well, supported by the buying power of investors just discovering the stock.
Nevro, which has a revolutionary new pain management system based in spinal cord stimulation, is a good example of this.
Another reason to hold on is if you’ve bought the stock based on a proven value-based investing discipline and that discipline tells you to hold on.
For example, Cabot’s ace value investor, Roy Ward, recently recommended Whirlpool (WHR) to his readers. Whirlpool, as most investors know, is the world leader in the home appliances business.
WHR has fallen 35% over the past year, and Roy says it’s a good value with excellent prospects for recovery, based on the fact that homebuilding is strong, while materials costs for Whirlpool are still falling. Plus, the stock provides a yield of 2.7%.
As always, Roy provided his readers with a Maximum Buy Price and a Minimum Sell Price (target) for WHR, and if you’d like to know them, all you need do is become one of Roy’s loyal readers.
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory