You Will Profit From Standing Out

Peter Leeds in Grand Central Station
Grand Central Station with Peter Leeds. Michael Paras

What makes some people think that the secret to the stock market is to do what everybody else is doing, and buy what everybody else is buying?  You will typically have greater success if you do not follow the crowd.  

In fact, the entire stock market system is not set up to allow everybody to win.  Like anything (music, sports, business, acting) a small minority capture outsized profits, while the also-rans tend to get lost in the crowd.

 

That is why you see the same celebrities on the cover of every tabloid, or everybody is suddenly reading the same book, or watching the same television show.  There are literally millions of songs out there, but we hear the same ones on the way to work day after day.  

We truly are in a winner-take-all world.  The stock market is no different, and has been called a zero-sum game, where (theoretically) someone needs to lose a dollar for someone else to gain one.  

If that is true, investors shouldn't be looking at stocks as lifeless entities which increase or decrease in value.  Rather, understand that every profit was when you out-foxed some schlep, while every loss was when some other schlep got one over on you.

Consider the analogy of people on a life raft.  They are mainly safe and dry on one side of the boat, until everyone tries to move to the safer and drier side.  Then the raft capsizes, and no one is safe or dry.

Many might think this article is suggesting contrarian investing - buying what everyone else is selling, or picking up investments which are out of favour.  While there is some merit to such an approach, it does not attain the kinds of gains you'll see by taking your strategy one step further.

Specifically, focus on where the masses are heading.

 What is the crowd going to be moving into now?  Effective anticipation will mean outsized profits.

The act of the mob purchasing the latest fad investment (3D printing, Bitcoin, dot com stocks, fuel cell batteries, recreational marijuana penny stocks, etc...) will push the value of the shares higher.  Eventually, the stocks have been lifted to ridiculous prices... for a while... then the masses move on.

This is when the share prices (or dollar value as is the case with Bitcoin) crash back down to earth.  There was a great deal of money to be made for those who "got in early" or anticipated the stampede, and there were massive losses for anyone who didn't cash out before the crowd.

Understand, going against the majority does not have to involve the fad and latest "hot stock" investments mentioned above.  It could be something more commonplace, such as everybody piling into utilities, or retailers, or gold miners, or technology.  The point is that wherever the masses move, that is where the profits will form.

So what to do?  

  • If you are in a mob-mentality investment right now, the kind where your grandma calls you up to tell you about it, or the cab driver talks up some stock, then you will want to start looking to move on.
  • If you have shares which have done well, based on the entire industry moving higher, watch for signs of that trend slowing down.  When the popularity runs out of steam, so too will the underlying shares.  
  • Anticipate what the next mob stampede will involve, and position yourself in the space before the masses move in... and cash out before the people lose interest or move on.
  • Read industry publications to get the first word on the up-and-coming wares or services.
  • Listen to what people are talking about at weddings and parties and other events.  What is going to be the next big topic or business?
  • Talk to your kids, and get a feel for what they are getting excited about.  Often, your child will suddenly be all about Shopkins, Cabbage Patch dolls, or Pokemon trading cards, or... This can often help you spot new trends among youth.
  • Observe new franchise restaurants or retail stores which seem to be suddenly springing up. If your friends are talking about them, and the line-ups seem to go out the door, you may want to look if they are publicly traded.