Hi Elliott Waver,

Most investors herd.

In The Socionomic Theory of Finance, Robert Prechter points out two exceptions to that rule:

The Commodity Futures Trading Commission follows the activity of three distinct groups of participants in the commodity markets: Small Speculators, Large Speculators and Commercials. Small Speculators are typically on the wrong side of the market at the turns. You might think that Large Speculators, because they have a lot more money, are right a lot, but they are likewise usually wrong at the turns. Commercials are the only participants in commodity markets who generally buy low and sell high. Our financial/economic dichotomy explains the reason: Commercials are in the business of manufacturing, not speculating, so they think economically rather than financially. They do not perceive commodities as investment items, so they are not participating in the herd. They perceive commodities as economic goods, so they search out bargains, just as a consumer does in the store. … In short, Commercials are consumers of commodities, not investors in them. As a result, they are comfortable taking the other side of a trade from speculators at market extremes.

Another exception to the rule is competent market technicians. A recent study of 2600 investment recommendations made by technicians and fundamentalists on financial television and the Internet came to a striking conclusion: “Technicians display stock-picking skills, while fundamentalists reveal no value. In particular, technicians overwhelmingly outperform fundamentalists in predicting returns over horizons of three to nine months…” The results of the study seem compatible with socionomic theory, which suggests that while all analysts share an impulse to herd, those who focus properly on market behavior have a significant edge over those who focus improperly on external conditions and events. 

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