In 2022, I read The Wisdom of Crowds by James Surowiecki - a book that completely rewired how I think about markets.
I promise there’s a chart in here, we will get to it.
But I first have to retell two quick stories from the book.
The chart will tie everything together.
In May of 1968, a Navy submarine called Scorpion went missing.
The only information the Navy had on its whereabouts came from the final radio signal transmitted from the sub.
A 20-mile circle was then mapped out in the middle of the North Atlantic as a starting point for the search.
In thousands of feet of water, finding the sub seemed like an impossible task.
Instead of consulting “search and rescue experts” to find Scorpion, the Navy assembled a team with a wide range of knowledge and expertise and asked them to guess where the submarine could be.
Yes, that’s right - literally just “guess.”
Not one person independently guessed the actual location of the Scorpion.
But the average of the group’s guesses? Just 220 yards away from the wreckage.
In 1906, at a country fair in England, 800 people entered a contest to guess the weight of an Ox.
Out of those 800 people, not one person guessed the weight correctly.
But the average of all 800 guesses? 1,197 pounds. Just one pound off from the Ox’s actual weight (1,198).
The stories of the submarine and the ox show that when you take the average of a diverse group, the collective answer tends to be closer to the truth than any single expert within that group.
That’s the Wisdom of Crowds.
The stock market works the same way:
Every trade reflects an opinion.
Every sale reflects a risk tolerance.
Every allocation reflects a time horizon.
Aggregate millions of these diverse, independent opinions and voila: a price is set.
You don’t have to like the price.
You don’t have to agree with the price.
But, in my opinion, you’d be foolish not to respect the price.
Hand up, I used to be a default contrarian and take the “other side” of most hot trades.
The concept of The Wisdom of Crowds is what changed my mind.
Now, when the price of an asset doesn’t make sense to me, I concede that the market knows something I don’t.
And I’m completely fine with that.
Okay enough words, it’s chart time.
The blue line shows the S&P 500 price.
The red line shows the average strategist target.
The blue dots mark when the market actually bottomed.
The red dots mark when strategists called the bottom.
The bars show how many days strategists lagged behind the market in identifying the bottom.
See how the S&P 500 bottoms first and then strategist targets follow?
That’s the S&P 500 price (made up of the independent views of millions) bottoming before any single group of experts.
And just like the submarine and the ox stories, that’s the Wisdom of Crowds in action.
Last week we had my former boss and someone who has taught me everything I know about charts, Tom Lee, on The Compound and Friends.
When Tom speaks, I listen. You should too. Link below:
That’s all for today. Have a fantastic day and thank you, as always, for reading!