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Airboats, Pythons, Alligators, and the Madness of Crowds

Over one of the last weekends I had the opportunity to go on an airboat tour in Florida’s alligator alley. Basically, it involves the boat operator whisking through narrow swamps filled will alligators and pythons. Why pythons? Well for those not familiar with Florida, it started when pet owners who decided they did not need or want their pythons any longer discarded them into the swamp areas.

Alligators feed off them and other “hunters” are encouraged to help rid the area of the pythons. But rather than delve into the workings of the alligator python relationship, a few moments struck me as being related to the markets and investor behavior.

At one point we came upon a cove where a bunch of other boats where all closely packed together looking to see alligators. Everyone was in the same spot looking at the same area. Meanwhile we picked a wide-open area to do some of our sightseeing. Sometimes in markets investors and institutions all are on the same side of a trade.

Take the US Dollar which has seen traders be net short of for quite some time. As rates rose this year, the dollar has rallied instead of continuing to trend lower. Last week, Bloomberg pointed out that Goldman Sachs reversed their bearish dollar call

They also illustrated the change in net short dollar positioning in a graph.

Source: Bloomberg.com

A book by Charles Mackay  in the mid-nineties had the term “Madness of Crowds” in its title. The book delves into the challenges when investors crowed into the same things and follow the crowd.

We saw this back in the .com era. We saw this with housing in the mid to late 2000’s. Some argue this is happening with Bitcoin.

So, the lesson here since I often relate things to trading may be to look to do things a little different. While many people follow the crowd into some version of the 60/40 portfolio, consider a hedged equity strategy. When everyone else in retirement simply ratchets up their bond portion of their portfolio, consider hedged or limited downside income alternatives.

Normally with markets most people do not get things right all the time. Why? Maybe like the airboats, they are all looking at the same thing. They are all listening to the same pundits on CNBC. Maybe it isn’t even a matter of knowing where to look but knowing you don’t have to know where to look. Just be hedged and stop trying to figure out the markets next steps.

Enjoy my video cruising through the mangroves!