La La Land was the odds-on favorite to win Best Picture at the Academy Awards. Instead, Moonlight won.
Hillary Clinton was the odds-on favorite to win the Presidential election in 2016. Instead, Donald Trump won.
Everyone “knew” that if Trump did manage to win, the stock market would dive. Instead, the stock market soared.
Everybody “knew” that sensible people in England would never vote to leave the European Union. Instead, Brexit happened.
Day after day, week after week, people assume that experts know what will happen. And day after day, week after week, the experts prove that predicting the future is notoriously difficult.
Yet people continue to listen to experts!
WHY IS THAT?
1. Because we tend to give experts more credence than they deserve. The “Argument from Authority” is a fallacy that derives from people giving undeserved respects to the opinions of “experts,” especially when those experts are opining about matters that are not in their field of expertise.
2 Because we like being part of a group of people that thinks similarly. Being lonely is uncomfortable; having other people agree with us feels good.
And most of all—
3. Because thinking differently is difficult! It’s much easier to let your thoughts wander down a familiar road than to create a new trail unfamiliar terrain.
Contrary Opinion, however, teaches that it pays to think differently, especially when the vast majority of people have succumbed to groupthink.
If everyone believes Apple (AAPL) is going higher, it may be a good time to short APPL, simply because buyers perceptions will have pushed the stock higher, and at some point there will be no new buyers of AAPL left to push the stock higher.
If everyone believes that companies will go bankrupt, as they feared in the Great Recession of 2008-2009, stocks will get pushed to extreme lows—and the brave person who stands up at the bottom and says, “I think you’re all wrong; I’m betting that stocks will go up from here.” can make a killing.
And if everyone believes the U.S. is doomed to a future of increasingly slow growth, simply because that’s what they see in the rear view mirror, it might be quite profitable to bet on the alternative.