During my just-completed due diligence trip across five western states, I kicked lots of telltale rocks. I also saw ravens, eagles, sheep, cattle, one dead coyote, several clusters of wild mustangs, and many herds of pronghorn antelope.
The profusion of wildlife covering the most active mining regions in the US impressed me once again.
The anti-mining crowd’s hysteria equating mining with mass extinction is just not true.
And we really did drive through the heart of mining country. A government official we met in Eureka County, Nevada told us that 50% of all mining permits granted in the US are granted in Nevada (and 50% of those go through the Battle Mountain BLM office). Despite the negative market sentiment, mining is booming in the American West.
I’m working on a detailed report on my due diligence findings for readers of The Independent Speculator. If you’ve been thinking about subscribing, doing so now will make sure you get my take, hot off the presses.
But there’s a general lesson from the experience I want to share…
Those herds of antelope grazed together. They looked up at us as we approached together. They bolted in alarm together. They moved as one. It was beautiful to see.
And it got me to thinking about the herd mentality.
That phrase has a negative meaning among speculators. I’ve used it that way myself. The herd spooks easily and can carry individual members right off a cliff. American Indians used this fact to hunt such animals, scaring the panicked animals right over the edge, and then picking up an easy meal at the bottom.
On the other hand, those same herd responses had to work most of the time or the animals would be extinct. Getting spooked out of a good grazing field over nothing is better than failing to bolt at the first sign of danger. I’d consciously adopt the same strategy if I lived in grass that grew over my head and harbored lions.
Fine. But it remains true that the herd instinct doesn’t account for intelligent hunters using it against herd animals. The same is true for investors. “Distort and short” predators use this fact on the markets today.
It’s not that chasing flavors of the day like Bitcoin and marijuana doesn’t work. It does. The investment herd mentality can be profitable precisely because it does create its own momentum. Some folks made money on crypto and pot stocks that I stayed away from. I don’t deny it.
The problem is that such momentum can turn negative in a flash. It becomes a financial cliff that unsuspecting investors can stampede over—usually because they refuse to believe a dip is actually a fatal drop. And there are certainly hunters all too willing to drive the masses into mass error.
There are three ways to profit from herd psychology among investors.
- The first is to spot a flavor of the day early and get out while it’s still going strong. Ideally, we take profits along the way, and so can’t be hurt if we miss the top and get out after the market goes into free-fall.
This isn’t my favorite type of speculation, but when I understand the market and the trend looks very solid—like lithium back in 2007—I will take the plunge.
It’s hard to time such speculations, but I can offer one guiding principle: if you don’t know if the flavor of the day is still in its early stages, assume it’s not.
- The second way is to look at resource markets heading for supply deficit and predict that something will become a flavor of the day or head into a long-lived secular bull market. This is much easier, and is the main strategy I employ in The Independent Speculator.
- The third way is to wait, like the clever hunters, for the herd to charge over the cliff. Then pick up any valuable pieces left at the bottom. For speculators, this is not as easy as picking up fresh meat was for Neolithic hunters; it may not be obvious what’s still valuable amongst the wreckage. But it can be done.
If, for example, you looked for dot-com companies with viable businesses after the dot-com crash, you could have made a fortune. Some people did. And I’ve done the same when sectors I understand well are clearly oversold.
Whether or not investment herds are should exist, they do. Whether or not predators should prey on such herds, they do. We didn’t create this situation, but it is what it is.
Savvy speculators don’t ignore reality; they use it to their advantage. I’m just glad that can be done without becoming an unethical predator.
Caveat emptor,
