12 Angry Investors

Ideas come from funny places. The other night, as I was wondering what to write about I took some
time off to watch the classic old movie “12 Angry Men.” For those too young to pay attention to black-
and-white films, or those too old to remember all the ones they’ve watched, it’s all about a jury trying to
decide a murder case the movie. In the film, Henry Fonda plays the lone holdout voting not guilty
against 11 of his fellows who want to convict the defendant and get on with their holiday celebrations.

As the drama unfolds, one by one he manages to bring the other jurors around to his viewpoint so, in
the end they vote to acquit. It’s a wonderful film, won some Academy Awards, if I remember correctly.
And I’m sure there are instances in real life where just such things have happened in the secret
chambers of a jury room. Maybe it happens that way sometimes; but not often. That’s because, as
sociologists tell us, people hate being “the outlier.”

In one study (repeated in different forms over the years) a social scientist put six people in a room and
asked them to decide a question that had one clear right answer. Five of the people were actually in on
the set up while one, the test subject, thought they had all been selected at random. The subject knew
the right answer to the question they were talking about but the other five were instructed to take the
opposite position. Time and time again, over the course of the discussion, the test subject eventually
came around to agree with the majority, even though he (or she – not only men respond this way) knew
it was wrong.

The reason is that following the crowd makes evolutionary sense. (I happen to believe in Darwinian
evolution but if you don’t, just think of it as a metaphor.) Back when our ancestors lived on the African
savanna watching what the rest of the troop did had real survival value – instead of counting on just one
pair of eyes and ears, they had 20 or 30. So, if one member of the group heard a loin’s roar or spotted a
snake in the grass, everybody ran and they all lived to see another day.

Unfortunately (for most folks) what works on the grassy plains does not work in the financial jungle of
the stock market. There, the rule promoted by Dan “The Money Man” Frishberg is “Don’t get caught up
in the compulsion to believe what the herd believes.” He is, of course, not alone in realizing this. The
adages are well known – Buy on the rumor, sell on the news. Or, buy on bad news, sell on good. That’s
because when everybody’s buying the price goes up and when everybody decides to sell it drops like a
stone. Duh, right? But people feel good when their beliefs are being confirmed by others, so going
against the herd is hard.

Despite the tendency for politicians to continue to talk about an economy in recession, economists
agree that the Great Recession has technically been over for more than a year. In fact, the economy is
showing signs of sustained growth and, Dan Frishberg says he expects that the upswing will continue
through the winter. Why? In the past the holiday shopping season has been followed by a drop off in
economic activity in the New Year. Not so this time, the Money Man predicts, because, in the new global
economy, strength will be sustained by foreign shopping, which doesn’t stop at Christmas. The global
economy is what we all feed off these days, as he was one of the first to notice. If you believe what he
says, now is the time to act, as people are just beginning to catch on to that trend.

Frishberg has been calling it this way since last summer – at a time when most so-called economic and
financial experts were busy watching out for a double-dip recession. The rally that began in July was, he
says, fueled in large part by a fear-based sell-off that occurred in June. Back in May and June the
conventional wisdom was that the economy could not really begin to grow sustainably while
unemployment remained stubbornly high. Yet, while unemployment levels had stopped building by that
point, it has been stuck at the same level – 9.6 percent, for the entire second half of the year. Still,
economic activity has been rising throughout that period. Revised 3rd quarter figures have been
upgraded since they were first announced – up to 2.5 percent, a historically low level but still more than
twice the rate it had been a year earlier, as the country began to emerge from the 2008-9 recession.

Frishberg sees the stock market continuing to grow based on continued economic growth through the
first half of 2011 and beyond. Indications that stock prices were rising showed up in Frishberg’s Market
X-ray. The indicators he reads showed demand for stocks growing, with buyers becoming more
aggressive while seller turned unwilling to sell at the then current low levels.

Among the reasons this trend can be missed is the day-to-day and week-by-week fluctuations in the
major stock indexes. Some of that volatility can be explained by the clock: at the start of the trading day,
when European markets are still open, movement in of the U.S. tends to reflect European attitudes and
concerns. Later in the day, after the European stock markets are closed for the day, U.S. traders become
more America-centric which, depending on the news of the day, can result in an epidemic of cold feet.

But these are strictly short term phenomena. The longer term trend lines are still pointing skyward and
Frishberg is telling listeners to “Radio Wall St.: The Money Man Report” that nothing on the horizon
suggests it is about to swing down again anytime soon. In fact, he is on the lookout for another fear-
based sell-off – albeit and mild one this time - that will make buying stocks and even more attractive
prospect.

In the long run, Frishberg points out, demand, or buying power, has been growing on average since
March of 2009 while selling pressure has been declining. People are less willing to sell at the current
levels – part of a long downtrend in selling pressure. That’s the lowest risk time to start buying stocks
and it isn’t over yet.

As John Bollinger, one of his regular guests on “The Money Man Report,” pointed out on a recent
broadcast, mid-cap stocks have shown sustained strength throughout this period. Even while the
markets as a whole were fluctuating and selling off in the panic prior to midsummer, the mid-caps
stayed on the high road. Since July the mid-cap stocks as a whole have risen by 35 percent, during a time
when the broad-based S&P 500 has gone up by 15 percent – not bad in itself but hardly as good as the
mid-caps.

Bollinger’s advice for the present situation is to stop thinking about market sectors like finance and
manufacturing. Just look at companies grouped by size because that’s how the market is looking at
things right now.
One potential problem facing investors is that even when they are reading the market signals correctly,
as Dan Frishberg has, they find themselves in a “right church, wrong pew” situation, where tech stocks,
for example, are doing well as a group but the particular company’s shares are not performing up to par.

A way to play this, whether you’re looking at traditional market sectors such as technology or retailing,
or sorting by size as Bollinger said is the way to go now, is to buy into a basket of stocks, represented by
an ETF. But investing in ETFs has its own set of issues to consider. Looking at options contracts, if the
bid-ask spread, if it too broad, that in itself can eat up a large share of your profits. In that case, a savvy
investor can create his own “shadow ETF” – assemble a few stocks that are shared by a number of ETFs
or the biggest holdings in a particular one, then buy those stocks instead of the ETF itself.