Almost thirty years ago I stepped onto an empty elevator on the top floor of Knoxville’s 27-story Plaza Tower. Inspired by Alan Funt’s Candid Camera television show, I turned and faced the rear of the car.
The elevator stopped at the 25th floor and picked up a second passenger. After about five seconds, she turned around with me, never saying a word.
The elevator stopped several times. By the time we reached the lobby, about half of the people on the crowded elevator were facing the wrong way.
That seemingly sophomoric prank was an invaluable investment lesson that continues to instruct and serve me today.
People would rather be wrong than different.
Last year a group of researchers from Princeton and Oxford (not the one in Mississippi) published an academic study titled “Visual attention and the acquisition of information in human crowds.” They hired actors to stand among crowds, instructing them to stare at an imaginary point in space.
Within seconds, unwitting passers-by would stop and join the actors staring in the same direction.
The researchers measured the relationship between the likelihood of the subjects to mimic the action(s) of those around them against independent test variables, such as the distance from the actor or the number of actors who were staring into the space at nothing.
They used this data to produce charts and reports with Greek letters, exponents, confidence intervals and T-statistics.
Their conclusions were the same as those from my 1980s elevator joke: people are generally followers. Like a 15-year-old girl who absolutely must have the newest shoes or she will just die, people loath being considered different.
Which brings us back to investing.
Successful investing requires both behavioral and analytical skills. It requires the behavioral strength to be different when you analytically conclude that the herd is wrong.
The behavioral skills may actually be rarer than the analytical ones. Everyone on Wall Street is smart and knows how to use a calculator. But many of them have lunch at the same places, drink in the same bars, wear the same clothes—and chase the same investments.
People consistently flock to investments that draw their attention simply because they are popular.
Sometimes it makes sense to do what others are doing. But you must fully understand your reason for buying a stock if you are going to do so with lonely conviction.
Several years ago my family and I passed a very long line at Disney World. I asked someone near the back of the line if she was waiting to ride the enormous popular Soarin’ ride.
She didn’t know where the line led; she simply saw all the people and decided she needed to get in the line before it got longer.
I walked to the front of the line. It was the line for ice cream.