Investors in the stock market tend to avoid books on psychology. This is a pity. Performing as an investor has much to do with the mind.
When Prophecy Fails was an academic study on psychology. Though it was published in 1956, it is as relevant today as it was then.
Three scholars monitored the members of a cult. The cult was led by a housewife called Dorothy Martin. She claimed to have been in touch with superior beings from a planet called Clarion. The aliens had sent her a message that a massive flood was imminent. Most of the US would be wiped out in a flood on Dec 21, 1954.
Martin’s followers were so committed that they gave up their jobs. They believed that the aliens would rescue them from the flood. The cult would be taken away in a flying saucer.
The flood never took place. However, the cult members did not lose heart. They became even more passionate about Martin’s virtues. The cult member’s belief did not waver. In fact, it got stronger every time a prophesy was proved wrong.
Popular market strategist
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This phenomenon was seen in the in case of a stock market strategist called Joe Granville. Granville was one of the early masters of the investment newsletter.
Granville’s newsletter required a subscription of US$1,000 a year in 1980. This works out to US$3,704 or $5,046 in today’s money. Granville was at the peak of his popularity in the early 1980s. He was making about US$10 million a year, which is about US$38 million today.
Granville travelled around America speaking at seminars. He was witty and well-spoken. TV stations jostled for his attendance. Granville had a smooth and endearing style of delivery.
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He not only provided stock market advice, but regaled his audience. His presentations started with props like puppets. On one occasion, he dropped his pants on TV to highlight stock quotes on his boxer shorts. He was an early ancestor of the TikTok stars of today.
Like Dorothy Martin, Granville’s investment predictions developed a cult-like following. In fact, he was bang on target in the 1970s. He urged his clients to buy gold in 1971. The precious metal rose six-fold between 1971 and 1978.
But, Granville’s forecasts lost its lustre in the 1980s. In January 1981, he urged his 3,000 subscribers to sell stocks and buy gold. Granville said that a cataclysmic crash that would be worse than the Great Depression was imminent.
The crash never came. Instead, the stock market rose four-fold over the next decade. Gold lost 70% of its value in real terms.
His stock tips lost 1% a year from 1980 to January 2005. The Dow Jones rose 12% on average in that time. He was a telegenic value destroyer.
Granville never wavered in his conviction. His followers were even more committed to his mantra than he was.
The vice-like hold that cult leaders have on investors is a cautionary tale. It suggests that investors need to divorce themselves from emotion.
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AI-driven advisers
Investors need not be caught up in a cult. There is an innovation that would help discipline investors. Robo-advisers are digital platforms provided by brokers. Some of them are completely automated. They are driven by AI — a technology that is constantly on our lips. Some robo-advisers provide human assistance.
Robo-advisers help investors enjoy diversification. Diversification is the only free lunch in investing. It is the one thing that the investor can do that would reduce risk.
Investors can construct portfolios that match their risk profile. For instance, an investment strategy of, say, 60% fixed income, 30% equities and 10% commodities, can be created. The robo-adviser would allocate clients’ money each month to this strategy.
The other benefit of robo-advisers is that they are cheap. The average cost of using a robo-adviser is about 0.2%. This is about a fifth of the cost of investing in a unit trust.
Various new robo-advisers have emerged in Singapore. They allow investors to use their CPF savings to construct portfolios. These players have apps that are easy to use.
The great innovation of the 21st century could be the robo-advisers. It reduces the risk of following a cult. Swiping an app may provide riches that eluded Granville’s clients.
Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in this column. This column does not constitute investment advice of any kind
