Lemmings & Wall Street

The lemming gets a bad rap! Common error says that these arctic rodents mindlessly jump off cliffs to drown in the ocean below. We further insult them by labeling people who blindly follow the crowd as “lemmings.”

The truth is that lemmings instinctively know when their population is getting too dense and will form large groups to migrate to a new habitat. During their migration, they have been known to jump from cliffs and swim to their new habitat, often swimming to the point of exhaustion and, frequently, death. Talk about courage!

Lemmings are a lot like businesses and hence the stock markets. Their numbers grow over time but periodically their space gets overcrowded and there is a need to pursue new horizons. They have a clear idea of the need to optimize their resources, pursue their objectives with full abandon and, yes, there are a few casualties along the way.

In the end, the lemming population stays strong and continues to grow, as do the markets. The difference is that I don’t see any “lemming shepherds” steering them around (aka: stock pickers). They do pretty well on their own and so do the stock markets.

Now, on to Wall Street. Among many other disasters, you’ll remember it as the place that packaged bad mortgages into even worse asset-backed commercial paper structures. It’s also the place where key executives receive obscene paycheques when they work there, obscene amounts when they leave their jobs and where they abandon capitalist principles to support socialist bailouts. Wall Street is not just a place in New York though. It’s a symbol for every institution and individual who claims that they have a better idea on how to package investments and which stocks to buy, hold or sell. Above all, the goal is to maximize the fee extraction.

Here’s the truth though. Analysis of the past century shows us that there is no benefit to trusting analysts and active stock pickers to build our portfolios. It is far better instead to invest in the market as a whole, using smartly diversified, intelligently traded investment products that don’t overcharge you.

Investment gurus who back this approach include Warren Buffett, Jeremy Siegel, Charles Schwab, Peter Lynch and William F. Sharpe. I’d pay attention to that.

We’ve had many, many financial crises over the years, and yet the forces of entrepreneurism and free markets continue to grow our wealth over time. Investors still stand at the edge of the sea, unsure of the global economy, scared witless from the 2008-09 correction and various other “crises du jour” and still dubiously eyeing the huge opportunities abroad. Eventually, they will need to take the leap again, restore the balance and watch their wealth grow again.