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One theme to be wary of in investing is when too many people believe in the same investment idea.
I refer to this as a contrary indicator, and an example of this theory is when the majority of people believe the market will go up it really indicates the market will move down.
Another name I prefer to use for this phenomenon is the bigger fool theory.
In the bigger fool theory there is such a frenzy to purchase something people often ignore the actual inherent value because they believe they can turn around and sell it for more, (to a bigger fool).
Since this is inherent to human behavior it has been around for ages and has recently been exhibited by the dot com bubble in the late 90’s and the recent real estate bubble.
Recent advertisements are causing me to ponder about the bigger fool theory and avoiding groupthink.
Back when our Congress failed to pass the first stimulus program and pretty quickly re-voted and passed the second, I started to become somewhat worried about inflation.
As mentioned in previous commentary, gold is a good hedge against inflation and financial chaos.
I started to become somewhat more bullish on gold during this time.
The concern for me currently is the fact that I am seeing advertisements to purchase gold and silver coins or gold and silver bullion all over the place.
This has me concerned that we might just be reaching the top in gold prices as advertising would not be so robust if consumers were not gobbling up the merchandise.
On the flip side, I do expect inflation down the road as all that “money printing” catches up with Helicopter Ben.
Helicopter Ben is a nickname for Federal Reserve chairman Ben Bernanke who stated in a speech back in 2002 that if interest rates fell to zero in a weak economy he would drop money from helicopters into the banking system to keep it going.
The nickname was given to him by critics who dislike the idea of expanding the money supply that way. (Ashley Seager of The Guardian, March 19, 2008)
The ongoing dilemma for an investor is having fundamental arguments which they believe will result in rising gold prices, and balancing that with a possible overbought argument which could lead to lower gold prices.
Every input is arguable.
Are the underlying fundamental arguments actually bullish for gold?
One theme to be wary of in investing is when too many people believe in the same investment idea.
I refer to this as a contrary indicator, and an example of this theory is when the majority of people believe the market will go up it really indicates the market will move down.
Another name I prefer to use for this phenomenon is the bigger fool theory.
In the bigger fool theory there is such a frenzy to purchase something people often ignore the actual inherent value because they believe they can turn around and sell it for more, (to a bigger fool).
Since this is inherent to human behavior it has been around for ages and has recently been exhibited by the dot com bubble in the late 90’s and the recent real estate bubble.
Recent advertisements are causing me to ponder about the bigger fool theory and avoiding groupthink.
Back when our Congress failed to pass the first stimulus program and pretty quickly re-voted and passed the second, I started to become somewhat worried about inflation.
As mentioned in previous commentary, gold is a good hedge against inflation and financial chaos.
I started to become somewhat more bullish on gold during this time.
The concern for me currently is the fact that I am seeing advertisements to purchase gold and silver coins or gold and silver bullion all over the place.
This has me concerned that we might just be reaching the top in gold prices as advertising would not be so robust if consumers were not gobbling up the merchandise.
On the flip side, I do expect inflation down the road as all that “money printing” catches up with Helicopter Ben.
Helicopter Ben is a nickname for Federal Reserve chairman Ben Bernanke who stated in a speech back in 2002 that if interest rates fell to zero in a weak economy he would drop money from helicopters into the banking system to keep it going.
The nickname was given to him by critics who dislike the idea of expanding the money supply that way. (Ashley Seager of The Guardian, March 19, 2008)
The ongoing dilemma for an investor is having fundamental arguments which they believe will result in rising gold prices, and balancing that with a possible overbought argument which could lead to lower gold prices.
Every input is arguable.
Are the underlying fundamental arguments actually bullish for gold?
If the answer to that is yes, how much of that argument is “priced in” to the underlying asset?
If you still believe the investment makes sense, how many other investors are also participating in this investment?
If too many people are participating then a premium may already be priced in and you may be late to the game.
Based on my investment experience, an investment can stay overbought or oversold for an extended time, especially if the investment crowd is getting larger.
All of these various inputs are why many people view stock investing like gambling.
These inputs change constantly and human psychology can often overcome any fair fundamental value and overly push prices up or down.
When too many people believe something is going to happen it is often wise as an investor to make sure you are not left holding the bag.
Gold as an investment was used as an example in this article and gold may or may not be an appropriate investment for you at this time.
It is best to contact your Financial Advisor to determine if this is an appropriate investment for your particular situation
