Don't Be A Sheep

When trying to speak to my children in a way that they will remember (it is not easy), I regularly say to them in a funny, but somewhat serious way, “Don’t Be A Sheep.”

Now that they are getting older, I don’t get as many smiles and giggles when I say it, but I hope they are getting the message. Don’t blindly follow and don’t be afraid to take the road less traveled.

Most anyone that I know tries to teach young ones this lesson. The “If Johnny runs off a cliff are you going to follow?” talk.

For some reason, however, many adults forget and act like herd animals when it comes to investing.


Almost every day you can see examples of appeals to this collective amnesia in what I call “don’t be left behind” headlines:

“XWZ Is The Top Performing Strategy for Q1…”

“ABC Investment Bank Projects that Growth Will Continue…”

“Flows Into HOT Asset Class Tops Past Records…”

Time and time again the evidence suggests it is a loser’s game to follow headlines like this, but time and time again investors rush for the cliff and run right over.

It is even worse when the headlines present something as the next shiny, new, complex strategy. That seems to attract investors like moths to a light.

Just as good consumer product firms know the power of the herd when they use cartoons to market to kids or sexy models to adults, Wall Street also is a marketing and product development machine.

Investment product teams now include both quantitative analysts and marketing professionals, and they work closely with chief economists and strategists. New New Things are created and then research papers are written and published in nicely packaged weekly or monthly investment strategy pieces. The materials are sent to clients promoting the best thinking of the firm. Then, after a few days, the new product, designed to be sold based on the research that hopefully has been talked up on CNBC, etc., is released to the sales teams (now often called Wealth Advisors or Managers). If all goes well, the thundering herd is off and running.

I could go on and on about this and cite many research studies by investment professionals and academics who have won awards such as the Nobel Prize for Behavioral Economics. I know that you have probably seen many of these reminders before though, so I will try to make my point using advice that I got early on in my investment career. An old, southern-born manager told me, “Son, people remember stories and like pictures, so get some stories and practice doodling.”

So here we go – two true stories and a picture.

#1 – The “Honest” Global Chief Investment Officer


Once, I was having dinner with the Global Chief Investment Officer of the firm for which I worked at the time. I was asking him why his monthly commentary and the first few sections of his team’s glossy monthly wealth management publication were becoming more and more short-term trade oriented (consider the advantages of shorting the currencies, etc.). After a little wine, he admitted that most of the pieces would likely not add any value and that some, such as hedging recommendations and currency calls, were quite risky. He then said,

“Preston, what you need to understand is that I get paid to publish ideas that we can sell for a profit. If I don’t, the transactional brokers and management complain. I then lose my job. I learned a long time ago that it pays to feed the Street.”

#2 – The “Honest” CEO and Global Head of Alternative Asset Management


In the process of trying to get good insight into a competitor’s hedge fund portfolio for a prospect presentation, I went to the CEO of my then-company. Previously, he had been the Global Head of Alternative Asset Management for the firm that had created the hedge fund portfolio that I was analyzing. Perfect, I thought, he led the group that created all of the products. After I gave him a brief overview, he smiled and said,

“Preston, you’re thinking too much. You are correct, the performance of the portfolios has been bad. We had a great brand though, an even better Ivy League MBA sales team, and we knew it. So, we looked at products one way. If we could sell them, they were good.”

# 3 – The Picture


In April of this year, a lot of celebrating was going on related to the NASDAQ. It had reached a new record and the herd was excited.

Screen Shot 2015-05-26 at 8.20.12 AM
Source: FactSet (index) and The Wall Street Journal

Many great “don’t be left behind” headlines were published but, if you look closely, you will see the full, more sobering story.

When was the last time the NASDAQ had a record close?


In early 2000, just after record amounts of money had moved into technology stocks.

What came next?

The dot.com bubble burst and the NASDAQ was down 78% in only 19 months.

So what was all of the recent celebration about?


The herd was finally breaking even, cheering its zero percent return for 15 years.

Unfortunately, this is nothing new. Stories of the madness of investment crowds are found in the tulip bubble craze of the 17th century, the South Sea bubble of the 18th century, the “Nifty Fifty” of the 1970s, and the Japanese land and stock rise and then crash in the late 1980s and early 1990s. Charts similar to the ones above would also show the herd continuing to rush into real estate and mortgage backed securities in 2007. What came next? The worst financial crisis in a generation, which was ignited by real estate and mortgage backed securities.

As we posted last week in our post, No Crystal Balls – Just Peace of Mind , please don’t reach for returns.

Keep focused on your long-term plan, be patient, avoid the hot investment, only invest in what you understand, and do not be sold.

Don’t Be A Sheep!