The consensus opinion has a loud and seductive voice. We must be aware of what the consensus views are, but we also need to be able to evaluate the longevity and veracity of the opinions. This week we will take a look at current and historic consensus opinions.
Whenever I get into a cab or go to a social event and tell people what I do they inevitably ask me what I think about The Market? My answer of I don’t know is a conversation killer. The stock market has dominated the consciousness of the public starting in the 1970’s and exploding today with the advent of CNBC and the Internet. In the seventies the investment consensus was set by institutional investors who created the Nifty Fifty of Avon, Eastman Kodak, Polaroid and Xerox. It was a boom/bust that ended with most of the stocks being down more than 70%. The current consensus is driven by hedge funds and mutual funds that are compensated by their ability to out perform the market and each other. The consensus has created a new group of stocks nicknamed FANG (Facebook, Amazon, Netflix and Google). Like the Nifty Fifty, FANG stocks have performed well. Will history repeat itself? We should be worried that it will, but successful traders will tell you that major price moves must climb the wall of worry to achieve outsized returns.
Our society gives successful entrepreneurs celebrity status. The academy award equivalent for these entrepreneurs is an IPO. The consensus opinion that allows IPOs to reach the market assumes that the early growth will continue until they are the next Microsoft, Facebook or Amazon. SNAP, GPRO and Blue Apron have proven the optimistic consensus wrong. In my industry of independent wealth management the optimistic view believes that eventually all good retail stock brokers will breakaway and join or start independent wealth management firms. I am guilty of promoting this narrative and the consensus view was joined by custodians, the financial press and recruiting firms. We all have a vested interest in this story playing out. Recently a study by Cerulli threw some cold-water on this opinion. Looks like The Pareto Principal is still alive and well.
Corporate CEOs can also fall prey to the consensus opinion. Chuck Prince’s immortal comment before The Financial Crisis unfolded are easy to make fun of now but it was the consensus opinion at the time. “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
Many of the established wealth management firms are following a consensus playbook. The playbook mimics the institutional investors' playbook of identifying established money managers that won’t get you fired. Will robo advisors and smart beta prove the consensus wrong? Only time will tell.
Staying on the Wall of Worry has been a successful approach. However, knowing when to jump off the wall is important too. The consensus opinion can confuse us. The Wealth Consigliere still hears the voice and advice of my Mom. “Would you jump off the cliff just because everyone else is doing it?”