The art of successful investing is to act contrary to the crowd. That was the theory of one Fred C. Kelly back in 1930.

In Why You Win or Lose: The Psychology of Speculation, Kelly wrote about his experiences with the market and the timeless lesson he learned:

I learned that men win or lose not so much because of economic conditions as because of human psychology. Certain mental traits that we nearly all have are barriers to success.

Therein lies the crux of Kelly’s theory. If most market participants behave normally, and normal behavior typically leads to mistakes, then the answer is to not act normal. Continue Reading…

Markets are made of up of millions of people — emotional and biased — who do weirdly wild things for no apparent reason. And yet, somehow, the markets are rational?

Adam Smith (George Goodman) discredits the thought in an imaginative way in The Money Game. One of the running themes can be summed up by Australopithecus.

Australopithecus was the “missing link” in human evolution, an ape-human creature with a smaller-by-more-than-half sized brain.

Something with such a small brain can hardly be rational or logical. It must be driven by baser instincts. So Australopithecus represents the unknown and unmeasurable emotion of the crowd.

…the real test is how you behave when the crowd is roaring the other way. We know a little about some individual types, but the crowd, the elusive Australopithecus, is still largely an unknown, an exercise in mass psychology still not accomplished.

Smith’s subtle jab shouldn’t be lost either: evolution gave us bigger brains but kept the baser instincts. That interplay of the crowd and the constant pull on emotions is a feature of the Game. Continue Reading…