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Peter Atwater: Middle School Markets

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We substitute stories of athletic and social prowess for anecdotes about investing skill.

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If I ever write another book on investing, it will be entitled Everything You Need to Know About the Markets, You Learned In Middle School.

As a behavioralist, I believe that market prices reflect sentiment and the beliefs of the crowd. The market is to stocks as middle school is to fashion.

The crowd picks what's in style and what's not. Money managers invest in Netflix (NFLX) today, like 14 year olds buy Aeropostale (ARO). They buy to fit in. And selling Apple (AAPL) when everyone else is piling in is like wearing Abercrombie & Fitch (ANF) when everyone else in class has moved onto American Eagle (AEO). You can do it, but you'll be sitting alone in the cafeteria.

Markets, like middle school students, don't just choose what is in fashion.

They choose who is in fashion.

There are cool kids and an in crowd. The faces that grace the cover of Barron's or the seats on CNBC and Bloomberg have been vetted by the cool table in the cafeteria.

As a result of their past actions - typically strong investment results, economic forecasts that proved to be correct or leadership of a thriving business - the experts have opinions worth listening to.

They know something we don't. Instead of leaning to hear what the cool kids did over the weekend on the athletic field or at the big party like we did in middle school, we turn on the television or open the financial papers to hear from financial stars. We substitute stories of athletic and social prowess for anecdotes about investing skill.

When you realize just how much the markets are like middle school, you can easily understand why equity analysts always have "buy" recommendations and why their earnings forecasts are tightly clustered together. There is social (and job) safety in being part of the herd.

Mergers cluster for the same reason. Even the most independent executives want to fit in.

You'll notice that like the cool table in middle school, permanence in the financial media or at the top of Lipper rankings is hardly assured.

Dating the wrong person (a.k.a. buying the wrong stock) or dropping the ball in the final seconds of the game (selling a stock before THE very, very top and missing out) or carrying the wrong phone (shorting Apple in 2014) can get you evicted from the cool table.

Fitting in means following the wishes of the crowd. Those who can't or won't face social ostracism.
And the longer the outliers hold to their socially-awkward beliefs, the worse things get. They lose more friends (investors and assets under management if you are a professional money manager, board support if you are a CEO, or consulting clients if you are a forecaster).

When things get really bad, you get picked last in gym (dropped from Institutional Investor's top analyst list) swirlied in the bathroom (abused on Twitter and the internet) and beaten up in parking lot (you lose your job).

Recently, it feels like the crowd in the parking lot has become especially fierce.

The cool crowd doesn't just want the outliers' lunch money. They want heads on a stick. Over the past three weeks I have seen several articles "naming names" and publicly shaming goldbugs and market bears alike.

Per the articles, the outliers' opinions have been analogized to "lunacy", "garbage" and even "crap."
Interestingly, and just like middle school, no one has come to the outliers' aid.  In fact, sentiment seems to be going the other direction.

Now that the gold bugs and equity bears have been mercilessly ridiculed and are truly voiceless and without support, the crowd has become larger and more strident. The crowd is now unopposed in its beliefs.

To suggest that equities could become a "pet rock,"  or that gold could soar here would clearly set me up to be mugged in the parking lot, but I am okay with that.

As I often write, investment decisions should bring back every middle-school anxiety you have.

With the in crowd not just celebrating victory but demanding the heads of the losers on a stick, I think a major peak in equities and a major low in gold/commodities is here.

To those who share this belief, welcome back to middle school. 

I'll save you a seat at the geeks and freaks table.

As for the rest of you... you'll find me in the parking lot after school.

Peter Atwater's groundbreaking book "Moods and Markets" is now available on Amazon and Barnes & Noble.
 
"Peter Atwater brilliantly provides a framework for understanding both the socioeconomic hubris that led to the great credit bubble of the past decade and the dark social-psychological hangover that has resulted from its collapse. In so doing, he offers an invaluable guide to what promises to be a very difficult and turbulent period ahead as we experience what he calls the 'me, here, and now' behavioral tendencies of the post-crash world."  -Sherle R. Schwenninger, Director, Economic Growth Program, New America Foundation


Twitter: @Peter_Atwater
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Position in SH, GDX, NUGT; creditor of JPMorgan
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