When Too Many Think Alike

"As a general rule, it is foolish to do just what other people are doing, because there are almost sure to be too many people doing the same thing."
   — William Stanley Jevons (1835-1882)

Marc Faber included a rather humorous story in his most recent issue of The Gloom, Boom & Doom Report. Marc is one of the leading thinkers and writers on the markets around and has been publishing his report for years from Hong Kong. He is an annual participant of the Barron’s Round Table every year. He follows up the following story with a quote stating

"In speculation, as in most other things, one individual derives confidence from another. Such a one purchases or sells, not because he has had any really accurate information…but because some else has done so before him"
— J.R. McCulloch 1830

This sums up a lot of what we are seeing in the Web 2.0 world these days. Many of these plays have popped up not necessarily because of inherent value or traction, but because they look similar or their investors hope to replicate some of the initial pops in the category like MySpace, YouTube or even Flickr. This list contains a plethora of companies focused on ad networks, demand generation, social networking and the likes. This is the first cycle when all asset classes have risen ranging from stocks to commodities. Everyone has had a taste of success. The explanation for it all is "the world is awash in liquidity". Everyone is also feeling rather complacent & secure. It reminds one of the Red Indians….

"It was autumn, and the Red Indians on the remote reservation asked their new Chief if the winter was going to be cold or mild.

Since he was a Red Indian Chief in a modern society, he had never been taught the old secrets, and when he looked at the sky,
he couldn’t tell what the weather was going to be.

Nevertheless, to be on the safe side, he replied to his tribe that the
winter was indeed going to be cold and that the members of the village
should collect wood to be prepared.
But also being a practical leader, after several days he got an idea.

He went to the phone booth, called the National Weather Service and asked "Is the coming winter going to be cold?"

"It looks like this winter is going to be quite cold indeed," the meteorologist at the weather service responded.

So the Chief went back to his people and told them to collect even more wood in order to be prepared. A week later,
he called the National Weather Service again.

"Is it going to be a very cold winter?" "Yes," the man at National Weather Service again replied,
"It’s definitely going to be a very cold winter."
The Chief again went back to his people and ordered them to  collect every scrap of wood they could find.

Two weeks later, he called the National Weather Service again.
"Are you absolutely sure that the winter is going to be very cold?" "Absolutely," the
man replied. "It’s going to be one of the coldest winters ever."

"How can you be so sure?" the Chief asked.
The weatherman replied, "The Red Indians are collecting wood like crazy."