This is Vikaas here, Investment Advisor and Founder of www.jaagrav.com. Today, I am going to talk about how Gustave Le Bon’s “The Crowd” is a must read for every market participant.
I happened to meet a fund manager who was setting up his own shop in one of the most expensive properties at CBD in Mumbai. Well, his office rental became a point of conversation, which is where it came to light that he wanted to stay close to his investing tribe, hence the choice of place. This was pre-covid.
Perhaps, the fund manager had not read “The Crowd” by Gustave Le Bon – fantastic book which talks about how an individual’s conscious activity gets substituted by the unconscious action of crowd.
In the investing world, there is a commonality of purpose – each of the investing participants wants to make money. The crowd, popularly known as “market” becomes an important consideration to reflect upon while investing.
The Market has certain general characteristics, as provided in the book, The Crowd:
- Mental Unity: Participants in the Market puts them in possession of a sort of Collective Mind which makes them feel, think, and act in a manner quite different from that in which each one of them would feel, think, and act if were in a state of isolation.
From the intellectual point of view, an abyss may exist between a great mathematician and his boot maker, but from the point of view of character, the difference is most often slight or non-existent.
No wonder, Einstein and Newton – both considered as geniuses, lost their individual rationality, thereby losing lot of money because they behaved like the Crowd and believed that market’s collective wisdom was greater than theirs.
- Impulsive & Mobile: Market is at the mercy of all external exciting causes and reflects their incessant variations. It is the slave of the impulses which it receives and is inadvertently mobile.
The very fact that that we have continuous feed of news and each news anchor trying to rationalize the movement of the Market basis some random external variable factor indicates the impulsiveness and mobility of the Market.
“Everything that was good for the market yesterday is no good for it today”
- Exaggeration and Ingenuousness: Whether the market is bullish or bearish, it leads to exaggeration of the sentiments of the market participants. This exaggeration of sentiments leads itself very quickly by a process of suggestion and contagion, considerably increasing its force.
Also, with majority of the market participants being naïve, this unsuspecting character leads to a story bubble of stocks, thereby creating extreme oscillations of greed and fear.
- Emotionality: Market is more rational than emotional. That’s precisely the reason market participants say “Bhaav (‘Market’) Bhagwaan Che” – “Price (Market) is God” But this is not always true!! Sometimes, the market turns more emotional than rational. This is where, value investors take contrarian bets. It is waiting in the side-lines for the right pitch to arrive and then go for the homerun, in baseball parlance.
When market turns emotional (sometimes), it is then, the prepared mind can take a sizable position and reaps in the rewards. Hence, an independent investor needs to understand the emotionality of the market along with his; this is when money gets made.
Benjamin Graham, father of value investing, succinctly coined market as Mr. Market, and the fact that it is there to serve you.
Next, I checked with the fund manager, While he had not read The Crowd, however, Covid taught him that staying close to his tribe, after all, does not matter beyond a point.
Please note that these are my personal views. Request you to conduct your own independent research or consult your financial advisor before investing.
Hope you enjoyed listening to this!!
For more interesting topics, you may check out my website, www.jaagrav.com. If you want to reach out to me, you may email me at vikas@jaagrav.com
Thanks!