A phrase that is often heard in the stock market is that ‘the consensus is always wrong’. This was used by many commentators to suggest that some apparent bubbles such as in commodities, house prices or high yield debt were far from fully inflating. Similarly, it was claimed that equities will only fall once all the perma-bears (or perma- bores as the smug bulls called them) had capitulated. Unfortunately, it is hard to believe life is that easy. After all, if it was, a computer could be told the rules of engagement, wait for the moment of maximum bearishness or bullishness and then act.

History confirms it is not that straightforward. For example, the talk for much of the late 1990s was about the bubble in equities, particularly in the technology sector. At the top of the market very few bears capitulated – however, the market still crashed. Yes, the majority (i.e. consensus) believed the market was fine (or that they would be able to change their mind and action their sales in time if new information arrived) but that was probably true in 1996 as much in 1999.

Often the consensus is correct. For example, all 38 economists polled ahead of a recent meeting of the Monetary Policy Committee believed that the base rate would not be changed. And all 38 were right!  Sometimes it is hard to judge what the consensus is thinking. For example, many surveys are designed to measure investor bullishness but it is hard to be sure that the surveys are asking the right people the right questions, or even obtaining truthful answers. We prefer to look at asset price movements that generally illustrate what effect the weight of money is having.

Nonetheless, history shows that in general, it is probably better to state that the consensus is often wrong and, much more importantly, when it is wrong there is usually a very sharp price reaction. Unfortunately, without any hard or fast rules as to when the consensus is wrong, it becomes much more difficult to know when to bet against it. Our response to this is to invest in those areas where we believe there is either the greatest chance of the consensus being wrong or where there is the greatest potential profit if it is wrong.

This article is not investment advice or a recommendation to buy any share or fund mentioned directly or indirectly, and should not be relied on in making any investment decision.

Please note that the opinions expressed in the above article are the opinions of the author alone, and do not necessarily represent the views of Investec Asset Management or its associated companies.

Investec Asset Management, or any of its associated companies or employees (including the author), may hold positions in any of the securities mentioned in the above article or in related securities including Temple Bar.

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