Comments on: The Problems Investors Should Have With the Wisdom of Crowds http://www.consumerismcommentary.com/2008/07/01/the-problems-investors-should-have-with-the-wisdom-of-crowds/ A premiere personal finance blog, established 2003. Within, Flexo discusses his own experiences with money, and he and other authors comment on a wide range of personal finance topics. Sat, 21 Nov 2009 16:42:00 -0500 http://wordpress.org/?v=2.8.5 hourly 1 By: Burnt by Rob http://www.consumerismcommentary.com/2008/07/01/the-problems-investors-should-have-with-the-wisdom-of-crowds/#comment-162377 Burnt by Rob Tue, 08 Jul 2008 11:29:31 +0000 http://www.consumerismcommentary.com/?p=3391#comment-162377 Bennett has been promoting his special brand of Financial planning for some time. I suggest before anyone use his 'planner' or follow his advice, they should do some due diligence. Google "Rob Bennett + Purcellville" or just go to these links: One of his sites: http://s162532268.onlinehome.us/Sewer/viewforum.php?f=1 A site that tracks and comments on his activities. He frequently participates as "Hocus": http://www.s152957355.onlinehome.us/cgi-bin/yabb2/YaBB.pl Bennett has been promoting his special brand of Financial planning for some time.

I suggest before anyone use his ‘planner’ or follow his advice, they should do some due diligence.

Google “Rob Bennett + Purcellville” or just go to these links:

One of his sites:
http://s162532268.onlinehome.us/Sewer/viewforum.php?f=1

A site that tracks and comments on his activities. He frequently participates as “Hocus”:
http://www.s152957355.onlinehome.us/cgi-bin/yabb2/YaBB.pl

]]> By: Rob Bennett http://www.consumerismcommentary.com/2008/07/01/the-problems-investors-should-have-with-the-wisdom-of-crowds/#comment-160946 Rob Bennett Wed, 02 Jul 2008 19:30:09 +0000 http://www.consumerismcommentary.com/?p=3391#comment-160946 This is a very important topic, in my view. Most people do not study investing before putting their money into a Section 401(k) plan. They are counting on the majority to get it right. But the majority is not independent in its assessments. The majority is heavily influenced by its personal experiences. In times when we have just lived through a major bull, assessments are heaviliy slanted in a pro-stock direction. I think that The Wisdom of Crowds is pointing at something real. There are times when group wisdom is better than individual wisdom. However, the stock market is the outstanding example of when the group wisdom can lead you wrong. Rob This is a very important topic, in my view.

Most people do not study investing before putting their money into a Section 401(k) plan. They are counting on the majority to get it right.

But the majority is not independent in its assessments. The majority is heavily influenced by its personal experiences. In times when we have just lived through a major bull, assessments are heaviliy slanted in a pro-stock direction.

I think that The Wisdom of Crowds is pointing at something real. There are times when group wisdom is better than individual wisdom. However, the stock market is the outstanding example of when the group wisdom can lead you wrong.

Rob

]]> By: MarketFolly http://www.consumerismcommentary.com/2008/07/01/the-problems-investors-should-have-with-the-wisdom-of-crowds/#comment-160937 MarketFolly Wed, 02 Jul 2008 16:42:46 +0000 http://www.consumerismcommentary.com/?p=3391#comment-160937 hey nice site, friend pointed me to this post As someone who's been tracking buffett for a while, I'd have to argue that it is actually in your best interests to invest along side him despite the time lag. because, after all, he is a very long term investor. so, your time frame is not dependent on near-term moves, you want long term moves. additionally, if you really wanted, you could just go and set limit orders for the area around where he was buying to begin with. that way, if it ever trades back to that price range, you'd be essentially buying where he bought anyways. and, he's shown time and time again with certain stocks that he buys at certain price ranges. not to mention, he has never really bought something and then sold it only 3-6 months later where you would "end up buying the shares he's selling".... that's not his investment style at all whatsoever. Only instance that comes remotely close to this would be PetroChina PTR where his investment appreciated so much so fast, he felt it had reached fair value and sold to take his profits. hey nice site, friend pointed me to this post

As someone who’s been tracking buffett for a while, I’d have to argue that it is actually in your best interests to invest along side him despite the time lag. because, after all, he is a very long term investor. so, your time frame is not dependent on near-term moves, you want long term moves.

additionally, if you really wanted, you could just go and set limit orders for the area around where he was buying to begin with. that way, if it ever trades back to that price range, you’d be essentially buying where he bought anyways.

and, he’s shown time and time again with certain stocks that he buys at certain price ranges. not to mention, he has never really bought something and then sold it only 3-6 months later where you would “end up buying the shares he’s selling”…. that’s not his investment style at all whatsoever. Only instance that comes remotely close to this would be PetroChina PTR where his investment appreciated so much so fast, he felt it had reached fair value and sold to take his profits.

]]> By: Transcendental Success http://www.consumerismcommentary.com/2008/07/01/the-problems-investors-should-have-with-the-wisdom-of-crowds/#comment-160909 Transcendental Success Wed, 02 Jul 2008 13:38:36 +0000 http://www.consumerismcommentary.com/?p=3391#comment-160909 I loved the book Wisdom of Crowds. The problems you outline were covered explicitly in the book; especially the role of mass media and hype. WoC explains that mass media tends to homogenize the crowd and therefore render it useless. The Wisdom comes from having lots of different people, but the mass media turns everyone into a parrot of the talking head and therefore just as stupid as the talking head. WoC even cited an experiment in which stocks were selected by a group with access to media and another without. The group with media access, and presumably better information, actually did worse because they lacked diversity. You are right that this is a problem, but the book listed it as such. There isn't a good way to access this crowd wisdom as an individual that I know of -- as you conclude. Interesting trivia but none too useful for me and you! I loved the book Wisdom of Crowds. The problems you outline were covered explicitly in the book; especially the role of mass media and hype. WoC explains that mass media tends to homogenize the crowd and therefore render it useless. The Wisdom comes from having lots of different people, but the mass media turns everyone into a parrot of the talking head and therefore just as stupid as the talking head. WoC even cited an experiment in which stocks were selected by a group with access to media and another without. The group with media access, and presumably better information, actually did worse because they lacked diversity.

You are right that this is a problem, but the book listed it as such. There isn’t a good way to access this crowd wisdom as an individual that I know of — as you conclude. Interesting trivia but none too useful for me and you!

]]> By: Anonymous http://www.consumerismcommentary.com/2008/07/01/the-problems-investors-should-have-with-the-wisdom-of-crowds/#comment-160750 Anonymous Tue, 01 Jul 2008 20:09:21 +0000 http://www.consumerismcommentary.com/?p=3391#comment-160750 Thanks for an insightful and well though out article. I personally like the comfort of a crowd, but know that the real reward is in the risk! Thanks for an insightful and well though out article. I personally like the comfort of a crowd, but know that the real reward is in the risk!

]]> By: Ocean http://www.consumerismcommentary.com/2008/07/01/the-problems-investors-should-have-with-the-wisdom-of-crowds/#comment-160711 Ocean Tue, 01 Jul 2008 15:18:13 +0000 http://www.consumerismcommentary.com/?p=3391#comment-160711 Although I agree with some of these assertions, I must respectfully disagree with how they tie into Surowiecki's Wisdom of Crowds idea. To address your points: 1) It is true that the mass media will tend to promote more pop-culture and sensational stories whose headlines can be made attractive, rather than concentrate on what is important to the consumer. But for every 10 people who just skim those headlines, you have a couple people who assume they can get an edge by sifting through it all to find relevant data, and will trade on those. People see opportunities in other peoples' laziness (for lack of a better word). 2) Again, although some people will unfortunately be scammed by the penny-stock spams, others will foresee a scam and short these stocks, or ignore them altogether. Even when journalists tote a certain stock (although it could cost them their job), many investors will want to take a contrarian viewpoint, assuming everyone else is buying this stock, they will try selling. Managers will hire marketing companies for their stock, but so will their competitors (as happens will all goods and services). Again, according to Surowiecki, the end value of the stock will reflect reality. 3) In response to the information delay we assume that, thanks to the internet and 24 hour news coverage, news is available as it becomes public. If it is not public, it cannot be traded on (since this would constitute insider trading). Although Warren Buffett can be seen as an anomaly, since he can move markets himself, in theory we can assume that he is just very thorough (and he actually invests in the companies and participates in their corporate structure, rather than just buying stock). Most of the time, at least from what I've seen, the crowd tends to be right. So if you bet with the crowd you will win small, but more consistently. If you bet against the crowd you will not win very often, but when you do you can win big (assuming better odds). The devil, as always, is in the details. Although I agree with some of these assertions, I must respectfully disagree with how they tie into Surowiecki’s Wisdom of Crowds idea. To address your points:

1) It is true that the mass media will tend to promote more pop-culture and sensational stories whose headlines can be made attractive, rather than concentrate on what is important to the consumer. But for every 10 people who just skim those headlines, you have a couple people who assume they can get an edge by sifting through it all to find relevant data, and will trade on those. People see opportunities in other peoples’ laziness (for lack of a better word).

2) Again, although some people will unfortunately be scammed by the penny-stock spams, others will foresee a scam and short these stocks, or ignore them altogether. Even when journalists tote a certain stock (although it could cost them their job), many investors will want to take a contrarian viewpoint, assuming everyone else is buying this stock, they will try selling. Managers will hire marketing companies for their stock, but so will their competitors (as happens will all goods and services). Again, according to Surowiecki, the end value of the stock will reflect reality.

3) In response to the information delay we assume that, thanks to the internet and 24 hour news coverage, news is available as it becomes public. If it is not public, it cannot be traded on (since this would constitute insider trading). Although Warren Buffett can be seen as an anomaly, since he can move markets himself, in theory we can assume that he is just very thorough (and he actually invests in the companies and participates in their corporate structure, rather than just buying stock).

Most of the time, at least from what I’ve seen, the crowd tends to be right. So if you bet with the crowd you will win small, but more consistently. If you bet against the crowd you will not win very often, but when you do you can win big (assuming better odds). The devil, as always, is in the details.

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