The Dow Report: The Majority is Usually Wrong
By Tim W Wood CPA, October 24, 2003
At first it may be difficult to accept such a statement as fact. So let us pursue the subject a bit. Let us start by dividing the population of this planet into two groups, the minority and the majority.
It is not especially pleasant to contemplate that the majority of people on this planet are not the most intelligent group. In almost any country, you would find that a large percentage of that country's wealth is controlled by only a small percentage of the people. A study titled "Characteristics of Stock Ownership" was recently published by the University of Pennsylvania's Wharton School. The report said that almost 50% of all stocks held by individuals in the United States were owned by approximately 1% of the American taxpayers.
It would seem that only a minority of the people on this planet have the ability and ambition to study hard, to figure out ways to accumulate wealth, and to raise their standard of living. The majority are apparently unable or unwilling to acquire the knowledge and take the action which would enable them to do the same.
Another difficulty of the majority is the herd instinct which they follow. The desire to go along with a large group is evident among people and animals. This is caused by the idea that there is safety in numbers - to think and act like the majority of other people. Anyone who dares to be different from the crowd is not considered to be "normal."
One of the big troubles with modern society is the conformity of ideas and action. I call it the mediocrity of conformity. Many people are actually afraid to be different - to pursue unusual ideas. But the road to success is paved with unusual ideas, and traveled by unusual people who dare to be different. In our modern society it frequently pays to be unusual and different.
Another trouble with the majority is that they have a tendency to believe what they are told, especially if something is repeated frequently. The majority find it is easier to accept the statements of others than to think for themselves.
The minority, who do not believe what they are told, must put forth intensive effort in their search for truth and knowledge. Sometimes the quest for knowledge is like sailing on an uncharted sea with nothing to guide you except the facts you learn as you go along. The success of your voyage depends on how well you can separate facts from fantasy, how well you can analyze the facts you discover, and how well you use them to reach the right conclusions.
In the stock market, the majority are inclined to believe what they are told in the form of tips, rumors and advice. The minority believe only what they know to be facts, and then reach their own conclusions by analyzing those facts.
Still another weakness of the majority is their disbelief in change. Most people do not expect or prepare for changes in the status quo. They believe that things will continue indefinitely just as they are right now. When the stock market goes up, the majority expect it to continue going up indefinitely. They do not bother to think about the time when the market will change its course and turn downward.
At the same time, the minority know that change is inevitable, and they are looking ahead, trying to figure how to tell when the market makes the change, and planning what actions they will take at that time. The minority know that every bull market has been followed by a bear market, and that every bear market had been followed by a bull market. The successful investor must possess a mind which is flexible enough to accept changing conditions.
The majority of investors are almost paralyzed by their opinions, because it is difficult to change an opinion which is well established. When a person has a definite opinion, there is the danger that he might not be able to change it until too late to take the proper action.
Almost everybody tries to form an opinion of the market. Many investors are constantly gathering information to help them form the correct opinion. As the opinion forms, the investor subconsciously becomes more receptive to the ideas, which help to substantiate his opinion.
There are always plenty of arguments for both sides of a case. Since the equal acceptance of arguments from both sides would result in frustrating confusion, a person must choose which to accept. Frequently a person accepts the arguments which support his own opinion, and he ignores the opposite side of the case. It is human nature to do so. Many people actively consider and publicize only the arguments which will support their opinions. The process is called rationalization.
The majority seem to have an uncanny ability to buy near the top of a bull market, and sell near the bottom of a bear market. Apparently that is the way things must be, otherwise who would the minority sell their stocks to near the top - and who would they buy stocks from near the bottom?
One should try to think and act like the minority, for there is little hope for the success of the majority. There is not enough room at the top for the majority.
Realizing that the majority is usually wrong in their action near the tops of bull markets and the bottoms of bear markets, I looked for ways to recognize majority action at those points I also looked for a way of timing the contrary action to be taken at those points. It would not be enough just to recognize when the majority was wrong. One must also recognize exactly when the majority was wrong enough to take the contrary action.
The words above are not mine. This was a quote from The Haller Theory of Stock Market Trends 1965, by Gilbert Haller. Recently, I have been showing you a few charts on advancing volume and advancing issues. I referred to this as market fuel. Mr. Haller's work only recently became known to me by one of my old time technical friends. He suggested that I read Mr. Haller's book. What I found in this book served to reinforce what I have been sharing with you over the last few weeks about the lack of confirmation from upside volume and advancing issues. As it turns out, Mr. Haller's work was solidly based on the use of volume and advancing-declining issues. Mr. Haller used these indicators to show him when the market was under distribution as is now the case. My point here is that in spite of all the hype from mainstream and popular public opinion the underlying volume and advance-decline work is telling us something else and now does not appear to be a time to be in alignment with the majority. Given that Mr. Haller's work was based on what I have recently been presenting to you as "Market Fuel" plus the fact that I currently have a contrary opinion on the market I felt that the above quote was appropriate. I hope that you are able to find some value in it.
Tim W. Wood
© 2003 Tim Wood