Absolute Return June Letter: The Wisdom of Crowds

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 Absolute Return June Letter: The Wisdom of Crowds

“Those who have knowledge don’t predict. Those who predict don’t have knowledge.”

Several years ago, off duty airline pilot Robert Thompson walked into a convenience store somewhere in the United States; however, having just entered the store, he turned around and left again without buying anything because, as he would later testify, something about the place spooked him. Was it the customer wearing a heavy jacket despite the hot weather? Maybe the shop assistant’s intense focus on the customer in the jacket? Or was it the single car in the parking lot with the engine running? Whatever drove him to walk out of there, Thompson’s decision was the right one. Shortly after he left the store, a police officer walked straight in to an armed robbery and was shot and killed. Thompson did not realise it at the time, but his reaction came instantly and instinctively, way before he became cognisant of the potential danger.

Now, go back some 80 years to March 1933 when unemployment in the United States was reaching an all time high.Thousands  of banks had failed in previous months. Bread lines stretched around entire blocks in many cities a cross  the country. Against this depressing backdrop, Roosevelt was about to deliver his first address to the American people. The newly elected President began his speech not by discussing economic conditions but with a powerful observation that still resonates today:

“So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself - nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance”.

Fear impacts our behavioural patterns, whether consciously or subconsciously. If someone threatens us with a knife, the instinctive reaction will be to take flight. If the stock market falls 20% in a single day, we will tend to react in very much the same way, even if the threat is not physical.

H/T ValueInvestingWorld

The Absolute Return Letter 0613 by ValueWalk.com

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The post above is drafted by the collaboration of the Hedge Fund Alpha Team.

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