In his book – The Most Important Thing, Howard Marks explains that markets fluctuate between extremes, driven by the behavior of the crowd. Bull markets occur when more people are motivated to buy than sell, pushing prices higher.
These extremes, however, signal inflection points where bullishness or bearishness reaches its peak. At these points, the market becomes vulnerable, as there’s no one left to push prices further.
Most people are wrong at these extremes, making it dangerous to follow the herd. Marks emphasizes that investment success lies in contrarianism—recognizing and acting against the crowd’s errors to capitalize on market misjudgments.
Here’s an excerpt from the book:
- Markets swing dramatically, from bullish to bearish and from overpriced to underpriced.
- Their movements are driven by the actions of “the crowd,” “the herd,” or “most people.” Bull markets occur because more people want to buy than sell, or the buyers are more highly motivated than the sellers. The market rises as people switch from being sellers to being buyers, and as buyers become even more motivated and the sellers less so. (If buyers didn’t predominate, the market wouldn’t be rising.)
- Market extremes represent inflection points. These occur when bullishness or bearishness reaches a maximum. Figuratively speaking, a top occurs when the last person who will become a buyer does so. Since every buyer has joined the bullish herd by the time the top is reached, bullishness can go no further and the market is as high as it can go. Buying or holding is dangerous.
- Since there’s no one left to turn bullish, the market stops going up. And if on the next day one person switches from buyer to seller, it will start to go down.
- So at the extremes, which are created by what “most people” believe, most people are wrong.
Therefore, the key to investment success has to lie in doing the opposite: in diverging from the crowd. Those who recognize the errors that others make can profit enormously through contrarianism.
You can find a copy of the book here:
The Most Important Thing – Howard Marks
For all the latest news and podcasts, join our free newsletter here.
Don’t forget to check out our FREE Large Cap 1000 – Stock Screener, here at The Acquirer’s Multiple:
