The Collective Madness of Wall Street

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In the modern connected, Internet age, following the herd may not only be ill-advised but also downright dangerous – in both social and financial matters. On the social side, connected devices and social media have spawned various fads and crazes of varying levels of stupidity and danger, with some fads even resulting in deaths. Some of the most unbelievably stupid recent stunts have included the duct tape challenge, the car surfing challenge, and the choking challenge just to name a few. So what explains this mass madness?

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”
 
-Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds, 1841

Written in 1841, the premise of Mackay’s book is that mass delusions can explain momentous irrational social and economic events throughout history. On social matters, Mackay discusses the influence of general hallucination behind hysterias like the witch hunts and alchemy. The case studies highlighted in Mackay’s book demonstrating the madness of crowd behavior have their analogs in modern times. Although his book touched on social subjects, it was his insights on economic bubbles that proved to be the most prescient and that still resonate today. His discussion economic bubbles and specifically of the Dutch tulip mania of the early seventeenth century have their analogs in a variety of modern economic bubbles. According to Mackay, during this bubble, speculators from all walks of life bought and sold tulip bulbs and even futures contracts on them. Allegedly, some tulip bulb varieties briefly became the most expensive objects in the world during 1637. Mass delusion was the only explanation for the tulip bubble.

The tulip bubble highlighted the gullibility of human beings, particularly in crowds. Before you scoff at the gullibility of your 17th-century counterparts, look no further than two recent modern bubbles to find gullible contemporaries. The dotcom bubble of the early 00’s and the mortgage-backed securities of the mid-00’s are examples of general hallucination at its very height. And you’d be sorely mistaken to think that this mass delusion only affected the uneducated investor. On the contrary. Even the foremost business, technology, financial and government leaders at the time of these bubbles were all subject to the same mass delusion as the general public. Remember President George W. Bush suggesting that the Social Security Administration should be able to invest social security funds in the Stock Market during the dotcom boom? These two contemporary examples demonstrate that mass delusions are truly collective in nature. Nobody at any level is immune. And it appears that no era is immune from mass delusions as there is a bubble developing as we speak – both in the Stock Market and with the cryptocurrency bubble. Like the tulip bubble, there is no rational explanation for either bubble, with stock prices far outstripping underlying economic values and principles and cryptocurrencies like Bitcoin possessing no intrinsic value.

These Wall Street bubbles of the distant and recent past highlight the perils of the herd mentality, yet investors continue to throw money at Wall Street and continue to fuel present-day bubbles. Why be a part of this collective madness? Interestingly, despite touting the efficiency of markets, Wall Street recognizes the underlying irrationality and gullibility inherent in herd mentality. In other words, Wall Street knows mass delusion is real. Want proof? Wall Street is even attempting to gauge this irrationality to predict potential crashes and booms. CNN Money has a Fear & Greed Index, http://money.cnn.com/investing/about-fear-greed-tool/index.html, that gauges general investor skittishness to predict potential drops and booms. Investopedia has its own Investopedia Anxiety Index, https://www.investopedia.com/anxiety-index/, sponsored by J.P. Morgan Asset Management.

Despite the volatility of Wall Street and its hypersensitivity to mass delusion and irrational behavior, millions worldwide continue to skew their investment and retirement portfolios heavily with investments highly correlated to Wall Street like stocks, bonds, derivatives and mutual funds either on their own, through brokers or through retirement accounts including 401(k)’s and IRA’s. In an instant, the value of these investments can be wiped out for no rational reason that can only be explained by collective madness. Nobody likes dealing with manic individuals. So why participate in a manic market?

Here at Four Peaks, we avoid the herds and the collective madness that permeates them. We embrace an asset class that is completely uncorrelated to Wall Street. The dramatic rises and falls symptomatic of herd behavior will never affect our returns or valuations. We made a deliberate and conscious decision to avoid the volatility of Wall Street and mass delusion. We wanted to invest in an alternative asset class not tied to the broader markets.

That is precisely why we invest in real estate in the sub-sector of mobile home communities (“MHC’s”). MHC’s are not only uncorrelated to Wall Street but have proven to move in the opposite direction of the rest of the economy in a recession with more people seeking affordable housing in challenging financial times. So, how is the health of your portfolio? How correlated is it to Wall Street? Escape the madness and choose an asset class that has a low correlation value to Wall Street and the headlines. Look to alternative assets and among alternative asset classes, look to real estate. And within real estate, look at mobile home communities.

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