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Yes, you read it right, crowd investing. Hedge fund professionals talk about a crowded trade when a significant amount of money and many investors are committed to a single investment idea. It is a bit like squeezing yourself through the door to join a popular event, knowing the only exit can be blocked when there is a fire. Common sense dictates you rather skip that event, but we also know that crowds seem to attract even bigger crowds, often overpowering common sense. Investing works the same way and let’s face it, following the crowd is so much easier than reinventing the wheel, especially when these wheels are rolling just fine. S&P500 Index investing feels like such an event. The S&P500 Index investment results over the past few years are stunning and it makes a lot of sense to invest in it, but beware of the crowd… $2 Trillion is invested directly in the S&P500 and $7 Trillion is benchmarked to it. This makes the S&P500 the biggest “crowd investment” in the world and will become a problem if everybody runs for the exit at the same time. Especially if you know that only a few large companies make up a big part of the index…
Do you know that nine out of the ten largest mega yachts are owned in the Middle East? The largest mega yacht in the world is “Azzam”, owned by the President of the United Arab Emirates. He is not alone: his prime minister and deputy prime minister own the respectively third and fifth largest mega yachts. You wonder what they talk about before a cabinet meeting about the falling oil price. Admittedly, oil will have to fall a lot further and stay low for a long time before these mega yacht owners decide to sell. However, when the time comes, the emergency exit window will be very small and filled with familiar faces. Three is a crowd in this respect… You see, crowded trades can have many dimensions and depend on availability, concentration and the “me too” urge.
So, what to do? Well, let’s start with the easiest: delay buying your mega yacht. They might well become cheaper. Secondly, diversify your investments, away from the crowd by picking stocks independent of an index. Thirdly, know the U.S. market is by far the deepest, most efficient market available in the world and represents many great international companies domiciled outside the United States, which are not represented in the S&P500. Compliance to law and financial recourse are very important for trust and to protect your assets in case of fraud. Transaction costs are the lowest and when it comes to choice of quality companies, with high return on invested capital, long-term growth and financial transparency, the U.S. market is second to none.
Joining a crowd assures you one thing: by joining, you pay full price and you depend on an even larger crowd for your performance, let alone your ability to sell. Try to un-crowd your investments, something that has worked successfully over many cycles and years. Try stock picking. There are still quite a few professionals out there who can pick great companies. Use them and your name could well appear in the top ten of largest mega yachts owners soon…