Mr Oliver said successful investing involves buying into assets that are “unloved by the crowd and undervalued, and selling assets that have become over-loved by the crowd and overvalued”.
“The trouble with crowds from an investment perspective is sourced in investor psychology,” he said.
“It is well-known that individual’s tend to suffer from lapses of logic.”
According to Mr Oliver, individuals in crowds tend to underestimate uncertainty, project the current state of the world into the future, ignore information conflicting with past decisions and tend to be slow in adjusting expectations to new information.
He also said they tend to focus on dramatic occurrences such as rapid rises and falls in stocks or assets, consider events as obvious in hindsight and give more weight to personal experiences in predicting the likeliness of events.
Mr Oliver said these individual lapses of logic become collective views on markets through stories of sharp increases and falls in the media, industry standards, interaction with friends, monthly fund manager’s performance charts and benchmarking.
“The volatility in shares so far this year provides a classic example of what can happen when the crowd gets a bit too optimistic on shares,” he said.
He explained that last year ended with relatively high levels of investor confidence in US shares, which left investors vulnerable to a correction, which has now happened.
He said that investor sentiment has now fallen following this correction, which he believes is a positive sign.
“Certainly, the flow of money into equity funds has not reached speculative extremes – having only just turned more favourable last year for US equity mutual funds, and in Australia the allocation to cash in the Australian superannuation system is still double pre-GFC levels,” said Mr Oliver.
“Overall, this suggests crowd sentiment and positioning towards shares is ok.”
