The Dow and the wisdom of the crowd

Then and Now

Surowiecki notes that the wisdom of crowds is not a natural idea to many of his readers. Rather, it is counterintuitive because people are wrongly led to believe that “well-informed will be outweighed by the poorly informed, and the group’s decision will be worse than that of even the average individual.”

I believe Americans feel that investing in the stock market today is counterintuitive because of unemployment statistics, dysfunction in Washington and ongoing negative news about the U.S. economy. When discussing the Dow’s all-time high, The New York Times indicated that investors aren’t pouring Champagne like they would have in past years. “The stock market’s volatility has scared retail investors for several years. A total of $556 billion has been taken out of mutual funds focused on American stocks since October 2007, according to the Investment Company Institute. That is an enormous pot of money that largely missed out on the market’s recovery,” says The Times.

Take a visual look at what investors may be feeling. On our new infographic on the next page, using data collected by zerohedge.com, you can see some of the reasons investors have thrown in the towel. It costs about a dollar more for each gallon of gas. Over 6 million more Americans are unemployed, fewer people are in the labor force and almost 50 million are using food stamps. Consumer confidence is vastly different today than it was back then. 

The U.S. financial situation is also vastly different. The economy is growing much slower, the size of the balance sheet is ballooning and debt has skyrocketed. It’s no wonder that gold was about $750 per ounce back in 2007; now, it’s double that.

But it cannot be disputed that the Dow doubled from its 2009 low.

The market noise of today will not be going away. However, investors can gain confidence in following the wisdom of the crowd. As famous investor Benjamin Graham said, "The individual investor should act consistently as an investor and not as a speculator.”

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