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Herd Instinct in Omaha

The dangers of social proof...

THERE have been four film adaptations to date of Jack Finney's 1955 sci-fi classic novel and serial The Body Snatchers, writes Tim Price at PriceValuePartners.

That of 1956 (our favourite), starring Kevin McCarthy; that of 1978, with a particularly creepy Leonard Nimoy; Abel Ferrara's 1993 version, set on a US military base; and 2007's The Invasion, with Nicole Kidman and Daniel Craig.

(There have been five if you include 1998's The Faculty, which is essentially the original, just relocated into a US high school.)

For our money, though, Don Siegel's 1950s version is by far the best, despite or perhaps even because of its B-movie origins (it runs to a super-slim 80 minutes, for example).

Filmed at the height of the "Red Scare" in the United States, its depiction of what its hero, Dr.Miles Bennell, initially dismisses as an "epidemic of mass hysteria" in the quiet California town of Santa Mira, in which people fear that their own relatives are no longer who they claim to be, has been interpreted both as an attack on the precepts of Communism – and simultaneously as an attack on anti-Communism. Screenwriter Daniel Mainwaring had some experience of Hollywood "Red Scare" witch-hunts, whereas Kevin McCarthy considered the film an attack on "Madison Avenue" attitudes.

Its director, Siegel himself, joked that the pod people represented movie industry executives. (What makes Invasion of the Body Snatchers so powerfully evocative, all this time after its first release, is that the fear it conveys – the fear that a loved one has been replaced by some kind of malign doppelgänger – is a genuine psychiatric disorder, known as Capgras delusion. This fear is especially poignant when experienced by a young child in connection with its parents. This is the essential premise of Invaders from Mars, a 1953 precursor to Don Siegel's film. And it is why The Shining continues to be ranked as one of the scariest films ever made.)

However you choose to interpret Invasion of the Body Snatchers, however, it remains – at least, in our view – one of the most terrifying films about the power of the mob, and of the dangers of social conformity, that you will ever see.

And of course, the years since 2020 have brought their very own "epidemic of mass hysteria", in the form of the Coronavirus "pandemic", in the hysterical coverage of the crisis by the mainstream media – and in the extraordinary medical and economic response of governments and authorities around the world. Fund manager Barry Norris of Argonaut Capital has been particularly outspoken on the inept and perhaps deceitful government response.

What is it that causes people to succumb to the "madness of crowds"?

The chances are, somewhat bizarrely, that it's an evolutionarily learned response.

The principle of social proof, a.k.a. "the herd instinct", determines that individuals feel more comfortable when they act just like everybody else. In our ancient hunter-gatherer past, it seems plausible that there were benefits to erring on the side of being risk averse. If a bush stirred whilst "the herd" was out hunting, for example, it could simply have been an innocent breeze. But it could also have been a stealthy and deadly predator. It would have made sense to bolt for safety, just in case. Those of our ancient ancestors who refused to run with the herd may well have left nothing but a void as part of their genetic legacy. In a sense, we may all be descended from cowards who at least lived to fight another day.

What was an optimal strategy for the plains of the Serengeti is unlikely to be an optimal strategy for our modern world where most real risk has been safely and distantly consigned elsewhere. But the behaviour clearly lingers. And it becomes self-reinforcing: the more people who behave in a certain way, the more appropriate that behaviour is deemed by others, and the population of the crowd swells.

The psychologist Solomon Asch conducted an experiment in the 1950s to show how peer pressure can distort common sense. You can see it re-enacted here. Subjects were shown a line marked on card, and three adjacent lines, numbered 1, 2 and 3. One of those lines was the same length as the original, the others were either noticeably longer or shorter. When conducting the experiment in isolation, the test subject consistently identified the lines of the same length. But when five actors were introduced into the experiment, each of which had been primed to mis-identify the 'correct' comparative line, the subject buckled – and went along with the incorrect answers of the group. It sounds trivial, but social proof can be immensely hard to resist. In the words of W.Somerset Maugham:

"If fifty million people say something foolish, it is still foolish."

Notwithstanding which, the legacy media persists.

This social clustering effect accounts for fads, bubbles, and stock market manias – and the resultant crashes, when the crowd finally runs out of new members to perpetuate the trend, so that the bubble spectacularly implodes under its own weight, and the same psychological clustering that drove the rally ends up driving the decline, as everyone stampedes to get back out again.

That sort of end-of-cycle implosion may already have occurred. As Danielle DiMartino Booth tweeted during the early stages of the Covid insanity,

"The markets are the product of 1999 & 2007 hooking up for a one night stand."

Judging by Nasdaq's performance in 2022, the progeny of that brief 'liaison' has now arrived. We are all at least somewhat aware that the main stock market beneficiaries of the Coronavirus scare were a limited number of US technology giants. That tide appears to have gone out. Jim Mellon for 'Master Investor' writes as follows:

"Although there has been a heck of a bounce in the tech sector in the past six weeks, the tech wreck has further to run, in my opinion, and this might be the last chance saloon for those clinging on to the old FANG [Facebook, Amazon, Netflix, Google] names, as most of them are going ex-growth and are still priced too highly.

"Yes, the old favourites like Tesla, Amazon, Meta and Alphabet are not through fighting the bear, but merely enjoying a brief ceasefire.

"All of them remain over owned, especially by passive funds, and all of them have fundamental threats looming to their tired business models. Tesla is facing increasing competition from old school and new EV companies, such as BYD in China, Korea's Kia, as well as GM and Ford, and frankly, Tesla's cars are in urgent need of an upgrade/remodel. Yet the company is still on 40x (optimistic) earnings for 2025.

"Meta faces cost pressures, and regulatory scrutiny, as well as a slowdown in digital advertising, and Alphabet has the same to contend with plus the real threat from Chat GPT and Microsoft's sudden reboot of Bing.

"Amazon's days of milking its cloud business AWS to sub vent its lousy retail business are coming to an end, and so on, and so on for so many darlings of the tech boom .

"This doesn't mean that tech (which is a such a broad term as to be almost useless, as just about everything employs tech these days) is over as a stock market hero, but that we need to ride the wave of cyclical stocks, such as miners, material suppliers, banks and so forth for a bit longer.

"In the meantime, my advice is to avoid the previous darlings of the tech boom, including crypto (told you!) and to add some new 'avoid' names , such as Apple which is crazily priced."

Warren Buffett has famously been a comparatively recent convert to Apple, which as at the end of the third quarter of 2022 accounted for over $126 billion of Berkshire Hathaway's equity portfolio.

Morgan Housel, author of The Psychology of Money, has penned a damning critique of attitudes towards Berkshire Hathaway, especially in the context of social proof:

"The Berkshire Hathaway annual meeting in Omaha attracts 40,000 people, all of whom consider themselves contrarians. People show up at 4 am to wait in line with thousands of other people to tell each other about their lifelong commitment to not following the crowd. Few see the irony.

"Anything worthwhile with money has high stakes. High stakes entail risks of being wrong and losing money. Losing money is emotional. And the desire to avoid being wrong is best countered by surrounding yourself with people who agree with you. Social proof is powerful. Someone else agreeing with you is like evidence of being right that doesn't have to prove itself with facts. Most people's views have holes and gaps in them, if only subconsciously. Crowds and social proof help fill those gaps, reducing doubt that you could be wrong.

"The problem with viewing crowds as evidence of accuracy when dealing with money is that opportunity is almost always inversely correlated with popularity. What really drives outsized returns over time is an increase in valuation multiples, and increasing valuation multiples relies on an investment getting more popular in the future – something that is always anchored by current popularity.

"Here's the thing: Most attempts at contrarianism are just irrational cynicism in disguise – and cynicism can be popular and draw crowds. Real contrarianism is when your views are so uncomfortable and belittled that they cause you to second guess whether they're right. Very few people can do that. But of course that's the case. Most people can't be contrarian, by definition. Embrace with both hands that, statistically, you are one of those people."

Whether "investors" continue to buy the likes of the FANG stocks, and notably Apple, out of fear (of missing out), or greed at the thought of all those future gains, is something of a moot point. Social proof is driving the bandwagon.

We have long argued that there are, realistically, only two ways of sustainably beating the market return – if you can stick to them. One is value investing (which we would define here simply as securing superior cash flows cheaply), and the other is momentum investing (essentially buying what is working in the market, as manifest in price action, and selling what is not). Value investing qualifies as investing per se, whereas momentum 'investing' is, realistically, more accurately described as trading or speculation.

No value judgment is implied here. These strategies, both of which we use in our asset management business, are pretty much mutually exclusive. A momentum 'investor' is sublimely indifferent to underlying valuation. For as long as the price of X – whatever X might be, whether it be a stock, an interest rate, a currency, or a commodity – is going up, a momentum 'investor' will be happy to be long. When the trend breaks, he is equally happy to be flat or short the same position. Price direction is all. Momentum trading is, in essence, a form of portfolio hedging against asset manager overconfidence.

The reason we continue to see merit in the momentum strategy is that, as we have seen for several years now, certain sectors are proving Keynes absolutely right – markets can remain irrationally or at least expensively priced longer than market participants can remain solvent. A fundamental manager would never have participated in the tech stock rally. A momentum trader would – but he would also be careful to get out soon after the market conclusively breaks.

One finding of the Solomon Asch social proof experiment was that if the unanimity of the group is disturbed, the power of the group (to distort correct perceptions) is greatly reduced. For this reason, seeking out alternative or dissenting voices some way apart from the mainstream media can be of tremendous value, both in the context of understanding the world, and assessing how best to invest within it.

"It's a malignant disease...spreading through the whole country."

The Covid counter-measures which pretty much all governments seem to have been keen to embrace have all been controversial for one reason or another. Specifically, forcing people to wear face masks in some specious and grotesque pantomime of hygiene also has implications – not least because people wearing masks will sometimes behave more unreasonably towards their fellow man than people whose faces are clearly visible. Especially if they are being whipped up by a loud and angry mob.

The Covid crisis (strictly speaking – the crisis caused by governments' cack-handed and hysterical over-reaction to Covid-19) was bad enough, but the poison of political correctness and aggressive, race-hustling, virtue-signalling by the likes of Black Lives Matter and Antifa, and the ongoing 'March of the Woke' more generally, lends events of recent years an almost apocalyptic flavour.


Ironically, the production of the 1956 Invasion of the Body Snatchers was beset with problems, most of which related to the distributors, Allied Artists, acting like pod people themselves.

First, there was wrangling over the film's title, to avoid any comparisons with the 1945 Val Lewton depiction of the Burke and Hare Body Snatchers. Then the budget and shooting schedule got chopped in half. But as originally conceived, the film was due to end with Kevin McCarthy stumbling down the freeway against the traffic screaming, "You're next! You're next!"

Allied weren't buying that, so insisted instead on a cheap framing device in which the story as flashback is book-ended by the police calling in the Feds, so that life can return to a happy normality. (Production designer Ted Haworth was apparently so incensed by Allied's ham-fisted intervention that he wrote to the studio's head, Steve Broidy, complaining that they were destroying the film. Haworth had previously worked on Strangers on a Train and I Confess, and he told Broidy that Alfred Hitchcock "would have given his eyeteeth to have made a picture that frightening".)

But it gets even more frightening – for us, that is.

We're not in 1956 any more. In 2023, our civil servants, politicians and our Government can't be the solution – because in many respects they're precisely the problem.

Real life doesn't always serve up happy endings on a platter. How we, and our valuable, irreplaceable capital, ultimately fare – that's up to us. But if we can manage to resist the various promises and threats of the mob, we like to think that we can probably resist just about anything.

London-based director at Price Value Partners Ltd, Tim Price has over 25 years of experience in both private client and institutional investment management. He has been shortlisted for the Private Asset Managers Awards program five years running, and is a previous winner in the category of Defensive Investment Performance.
See the full archive of Tim Price articles.


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