It is scary how quickly this year has gone. It only feels like yesterday the entire equity market was collapsing and supermarkets were (bizarrely) being emptied of toilet roll. 

There is a fantastic book called The Extraordinary Popular Delusions and the Madness of Crowds. It was first published in 1841 so archaic in language but offers insights into how people react and think. 

The truth is that people are not rational and are often incapable of making decisions in their own best interests. 

For example, let’s say I am offered £200 by a third party and told that if I share it with someone and they accept then we can both keep the full £200 between us. If the other person doesn’t accept, then nobody keeps the money. 

You might expect that because I am fair I would offer you £100 and keep £100 for myself. If you say yes, then we both keep the £100. 

But I have studied economics. The economic argument would be to keep £199.99 for myself and offer you £0.01. This is because you would be one penny better off than if you did not have the penny. Therefore, under this argument you would accept my offer because this is clearly in your own best interests. 

However, it turns out I am generous and have decided to offer you £5. I will keep £195 which I will book a nice spa hotel for my wife and I. You can buy a flat white and keep the change. 

Do you accept?

Possibly not! Despite you being a whole £5 better off – the unfairness of it stinks and it’s possible that you want me to miss out of the money as a result out of spite. 

This goes against all economic theory. But that’s the problem with economics. It assumes that there are no emotions. No greed or jealousy, no fear of missing out, no comfort in doing what everyone else is doing and no being scared of acting outside of the herd.

What does this mean for stocks?

The market is slow to change its opinion. It lags change, and presents opportunities. 

I remember something Paul Scott once said at a Mello presentation: “The ability to change your mind when the facts materially change is a key factor of outperformance” – or something similar! He…

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