The Psychology of Markets & The Beard Trend

The nature of markets, in particular the herd mentality often exhibited, flies in the face of the efficient market hypothesis and the notion of an efficiently priced market. Efficiently priced doesn’t necessarily mean fairly priced; as we’ve seen over time, asset prices can move significantly beyond (or below) some reasonable long term fundamental value. Irish property was the classic example, where prices moved to levels that could not be justified on any long term valuation metric. Houses were selling at 100 times rental yield!

This type of behaviour happens at a broad asset market level but also at an individual stock level. Equity markets are higher over the last 18 months, but look at the stock prices of 3D printing companies. The concept of 3D printing is mind blowing and so people clamoured to buy shares of companies leading the way in this new technology. For example, take 3D systems (DDD:NYSE), the stock hit a high of $97.27 on December 30th 2013, but investors have seen the stock drop painfully back to reality, closing at $21.33 on Friday, a decline of almost 80%!

How can this happen, how can so many people get it wrong you might ask? The answer is on mens’ faces, beards! This is the latest trend that seems to have just taken over. Last Saturday there was a whole segment on national radio dedicated to taking care of your beard. Asked by the host ‘what should people do if they are unsure what beard suits them best?’ The barber’s advice, ‘talk to an expert, a barber can understand the shape of your face and the other intricacies involved in growing the right beard’!

It was quite funny listening to it, but this latest beard trend is a real life example of the herd mentality that permeates financial markets. The market is simply a collection of people, prone to sheep like tendencies. I’m not having a go at people with beards, I’m just observing a real life example of human behaviour, the same type of behaviour that is behind market movements, where a large cohort of people simply follow a trend, all the while believing they are being original of course.

While these ‘fashion trends’ are harmless, when it comes to investment it’s always best not to be lured into being a follower. Never forget the long term fundamentals!