Why do so few advisors see a downturn ahead of time?

The herding mentality is a part of our natural psyche. Scientific studies of financial behavior have been even revealed where, in the brain, this herding instinct originates. Our discussion will be more brief (and therefore less complete) and on a simpler level.

We have probably all heard of the "peer pressure" test. In this test all the members of a class, except one, are told beforehand to answer a simple question with the same incorrect answer by a show of hands. Upon seeing that he holds a different view than all his peers, the lone student, unaware of the ploy, changes his answer to that of the rest of the class.

The same thing happens in investment circles. We all reason, surely one advisor cannot be privy to some information that the rest of the market doesn't know. This line of thinking goes part and parcel with the efficient market hypothesis.

The situation is even further compounded during long bull runs. Masses of advisors are "making" money, especially at market tops, and use this to validate their correctness. Since no one can time the exact top of a market, the contrary advisor seeks to reduce exposure to a risky market, and in so doing, takes on career risk. Clients, in the situation of under performing the markets for a period of time, may leave. Most financial advisors, no matter how much they suspect they truth, will not risk appearing to be wrong alone and leave the party early.

Lastly, the final phase of a bull market reinforces ignorance. Though lacking in breadth, the indices have risen so high and for so long, they are hard to beat. Expert advice has done no better as they have shied away from the stocks with the highest gains, noting that they are overvalued. Consequently, in depth research is seen as having little, or no value. In a bull market, marketing is more lucrative than research. Savvy marketing trumps market savvy.

So though we have been told to buy low and sell high, we lose perspective. We ignore John Templeton's adage to never follow the crowd and we ignore Warren Buffet's emphasis on research. Having the resolve to go opposite of the herd, is more important today than ever. Looking for the few money managers who have structured their business to go opposite of the herd is like searching for the proverbial needle in a haystack. Fortunately, there is a group of needles.