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What to Learn from the Brexit Vote Panic

The panic that followed the Brexit vote was predictable. What has happened since wasn’t. If you took a contrary point of view and refused to panic and sell half your stocks, you’ve probably made a lot of money.

Today I want to weigh in on the Brexit vote, the panic that followed, and how short-lived that panic was on Wall Street. But first, I want to tell you about my eighth-grade history teacher, Max Pofcher…

Mr. Pofcher called me an iconoclast, apparently because I didn’t accept his teachings as readily as the other children.

Mr. Pofcher was a very good teacher, and one of my all-time favorites. His parents had emigrated from Russia in 1897, and he had a serious old-world manner that I appreciated.

But I had an independent streak in me. I often felt more comfortable questioning the common wisdom than automatically accepting it—and I often felt more comfortable when outside the crowd than in it. So I was happy to accept Mr. Pofcher’s label, and since then I’ve carried it proudly if (usually) quietly.

But from time to time, situations come along where I can’t avoid being a little more verbal in expressing a contrary opinion.

Case in point: The Brexit vote two weeks ago.

The consensus opinion in the wake of the England’s surprising vote to leave the E.U. was that it was a horrible decision that would wreak havoc on the progress made via globalization over recent decades.

So investors panicked, and for two days, they sold shares indiscriminately.

But for my Cabot Stock of the Week readers, I recommended selling nothing following the Brexit vote. And on the third day, right on my regular weekly schedule, I recommended a new stock to my readers—a stock that had lost 19% of its value since mid-April—and the stock is now up 7% since then!

Admittedly, part of my sangfroid comes from the trait that Mr. Pofcher noticed; I draw little comfort from following the crowd.

But that trait has been amplified and reinforced by my decades of experience in business, which time and again have taught me that it pays to think differently.

Or, to put it a bit more bluntly:

When everybody thinks alike, everyone is likely to be wrong.

That was the message of Humphrey B. Neill, whose book, The Art of Contrary Thinking, was first published in 1954.

“…” But Neill was only building on the work of Gustave Le Bon, who wrote The Crowd, A Study of the Popular Mind in 1896.

“…” And Le Bon was simply following in the footsteps of Charles MacKay, who wrote Extraordinary Popular Delusions and the Madness of Crowds in 1841.

“…” Today, we recognize the field these men were plumbing as crowd psychology. Hundreds—perhaps thousands—more books have been written about it.

Because of that, we think we’re pretty smart.

But the funny thing is that even though experts have been writing about the occasional irrationality of crowd behavior for a very long time, and trying to make us smarter, the behavior of crowds hasn’t changed!

Individually, we may each be brilliant, but as groups, we can be stupid as sheep.

Smart investors like Warren Buffett have known this for years.

But time and time again, investors find themselves running with the sheep rather than thinking independently.

So what’s an intelligent investor to do?

To get into it deeply, you should read the books written by the gentlemen above. I have all three on my bookshelves and have read them all, some more than once.

Failing that, try to understand the wisdom behind one of my favorite buttons.

“…” For investors, the value to this button is this:

The market consistently and instantly aggregates all the information and all the perceptions (hopes and fears) possessed by all investors, and in doing so tells those who are paying attention how it feels about the future.

So all you need to do to be a successful investor is to interpret the charts, and act accordingly. If you do this, you’ll never be on the wrong side of any market for long.

What you don’t need to do (and ideally shouldn’t do) is stay fully informed about as much as possible and develop your own opinions about matters. The risk then is that your opinions will diverge from the market’s and you will ignore the wisdom of the market!

The trouble with not being well informed, however, is that you can’t discuss current events with people—and that’s no fun. My solution is to read widely, and to develop opinions, but to trust the actions of the market.

But here we come to an important distinction. By heeding the actions of the market, I do not mean agonizing over every little twitch; I mean recognizing the major trends.

The two days of Brexit vote selling was a kneejerk reaction to global headlines, but it did not change the major trend of the overall market, which remained up. So the rational course was to evaluate your individual holdings (as usual) but to ignore the brief but overwhelming chorus of panic selling that accompanied the Brexit vote (particularly because the reason for the selloff was so obvious), and remain true to the major trend, which quickly reasserted itself.

Do I have opinions on the Brexit vote? Of course I do. I believe the long-term trends toward globalization and trade and cooperation are good and will continue to reduce conflict and improve wellbeing around the globe.

But I know that just as the market has periodic corrections in its long trend higher, so do those positive trends for the world occasionally need to experience unexpected corrections—and those corrections will end in time.

So I don’t worry about it.

Plus, I know that there are many more factors that determine the future of the market than a vote in England, and it’s not worth my time to puzzle them all out and determine their effect on the market—particularly when the mass of investors have already (in aggregate) done that for me!

These factors include—but are not limited to—corporate earnings, interest rates, bond yields, currency fluctuations, debt levels, trade agreements, tariffs and other taxes and politicians, to name a few.

So I just keep my eye on the market, and try to stay in sync with the long-term trends. In the end, it’s pretty simple.

And speaking of simple:

Video Everywhere

I like investing in strong long-term trends that can overpower short-term market fluctuations.

In the past, such trends have included:

The growth of the HMO industry

The growth of the manufactured housing industry

The growth of the microcomputer industry

The growth of online investing

The growth of the data storage device industry

The rollout of the fiber-optic network that is now the backbone of the internet

The rise of online shopping

The growth of China

And the first big surge in the solar power industry

And today we’re seeing a boom in the trend that I call Video Everywhere.

Video today is not only in televisions and smartphones and tablets and computers, it’s also in drones, surveillance systems, military devices, access control systems, medical devices and more.

And I see no reason for the trend to end.

In fact, the recent mania surrounding Pokemon Go is just the tip of the Augmented Reality and Virtual Reality Booms, all of which will use more video. (I downloaded Pokemon Go—for research purposes of course—and have already caught a few monsters.)

And if you want to invest in this Video Everywhere trend, I see no better investment than the leader in the graphic processing chip industry, Nvidia (NVDA).

In the latest quarter, revenues at Nvidia grew 13% to $1.3 billion while earnings soared 39% to $.046 per share.

Trouble is, NVDA has already had quite a run and is ripe for a pullback here, particularly if the broad market pulls back for a while.

“…” So what do I recommend?

One course is to check out Cabot Top Ten Trader, which originally recommended NVDA back in February when it was trading at 32. Every week, lead analyst Mike Cintolo recommends 10 stocks whose charts are primed to surge higher, and if you play your cards right you can get on board the next Nvidia. For details, click here.

But if you really want to own NVDA, then I strongly recommend that you join the loyal readers of Cabot Growth Investor, where Mike runs a concentrated portfolio of 10 growth stocks (maximum) and is right now looking for a good entry point for NVDA. Get more details here.

Timothy Lutts is Chairman Emeritus of Cabot Wealth Network, leading a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems.