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Avoid the Crowd

Mises Daily: Saturday, December 15, 2007 by

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[This article originally appeared in Liberty Watch magazine.]

While those who watch and follow the advice of CNBC's Jim Cramer or the conventional Wall Street wisdom are being treated to agonizing stock market volatility, constant readers of Bill Bonner are sleeping soundly while the price of gold hovers near new highs.

In 2003, Bonner and Addison Wiggin penned Financial Reckoning Day: Surviving the Soft Depression of the 21st Century, warning that the United States will have a "slow motion slump" or a soft depression. Near the end of Financial Reckoning Day, he provided the trade of the decade, which was to buy gold and sell the Dow, a trade that is looking good so far. "Should he stay with the trade?" Bonner asked. "We cannot say, but it's best not to look until 2010."

Speaking to a FreedomFest audience at Bally's Hotel in 2004, Bonner said gold is a good thing to hold "when the Vigoro hits the Mixmaster."

Bonner and Wiggin next examined the American empire built, not on stolen riches, but debt, in their book Empire of Debt: The Rise of an Epic Financial Crisis. Their investment advice was to invest like an insider on private information and personal experience and be patient and faithful. Essential rules must be followed, such as "the traditions, the lessons of history, the distilled wisdom of generations of dead people." And finally: "Be prepared. Say something nice to your mother. Offer a bum a drink. And buy gold."

Political journalist Lila Rajiva has now teamed with Bonner to author another investment classic, Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics. Bonner and Rajiva's message is that when people stop thinking for themselves and become part of the crowd they fall prey to Do-Gooders Gone Bad (title of Chapter 1), assorted witch hunts, politicians of various stripes, romantic radicals, globalization gurus (like Thomas Friedman) and, of course, bubble-making central bankers.

This is not the book for readers looking for discussions of P/E ratios and stock price momentum. Mobs explores the thing that really keeps investors from building wealth – the space between their ears.

On Election Day 2004, voters waited in line up to five hours to cast their ballots. Dubya won because Americans feared the terrorists. But as Bonner and Rajiva point out, you're more likely to drown in your bathtub than be killed by terrorists. In fact, as many people have died of allergic reactions to peanut butter than have died at the hands of terrorists, according to government statistics. But billions of dollars are spent looking for Osama bin Laden and stringing up Saddam Hussein, while jars of peanut butter are much bigger threats to the peanut allergic.

So why is it that humans make such boneheaded moves? Rajiva and Bonner enlist the services of British anthropologist Robin Dunbar, whose work convinces him that the maximum number of people and things the human brain can cope with is around 150. Any groupings beyond that require complex rules and regulations to get the same level of cohesion that you get naturally if one sticks to nature's limits. When humans don't have firsthand knowledge of something, "their reasoning power tends to lead them astray."

In Mobs, Messiahs, and Markets, Bonner continues his thrashing of columnist Thomas Friedman, author of The World is Flat, a book that more people have recommended I read than any other. Bonner would say I shouldn't bother. "It is not just that Thomas Friedman's metaphors clash with each other like mismatched furniture at a yard sale," Bonner and Rajiva write. "What insults logic is that he tries to squeeze his theories into his metaphoric hand-me-downs."

When it comes to specific investment advice, the authors advise us to "do nothing." Stocks and real estate are too expensive. So, don't do anything, and "[g]old is as close to 'nothing' as you can ever get," the authors advise. But their more important point is that people don't believe they must save to get rich; that the only way to get rich is to get lucky. And so people buy what is trendy – stocks or houses – so that no one can criticize them. People invest to satisfy "other goals, like status, respectability, and security."

So, while the romantic young celebrate the fraud that was Che Guevara and baby boomers fall for Thomas Friedman's nonsense, rich guys are spending millions to convince us that Islamic terrorists are at our doorstep.

The world may be getting crazier, but Bill Bonner never disappoints.