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How I Invest with the Wisdom 🦉 of Crowds
Remember the TV show Who Wants to Be a Millionaire?💰
At its peak, it had nearly 30 million viewers in the U.S. alone.
Over 90 countries, ranging from 🇦🇫 Afghanistan to 🇻🇳Vietnam, ran versions of the show.
And the U.S. version is still running and chugging along as a popular syndicated program.
One of the most famous parts of the game is the “lifeline.”⛑️
Whenever a contestant is stumped by one of the multiple-choice questions, they can use one of three lifelines to make the question a little easier to answer.
The "50:50" lifeline eliminates two of the wrong answers🎲 ."Phone-a-Friend" allows you to call someone at home for help📱. And "Ask the Audience" polls the studio audience to see which answer is correct.
Which lifeline, then, is the most reliable?
50:50 doubles your odds.🎲
Phone-a-Friend produces the correct answer 65% of the time.
But Ask the Audience produces a correct answer 91% of the time.
In other words, polling the audience almost guarantees the correct answer.👍
The crowd is wiser than each individual "expert."
The Origin of the Wisdom🦉of Crowds
James Surowiecki popularized the "wisdom of crowds" concept in his 2004 book The Wisdom of Crowds: Why the Many Are Smarter Than the Few.
Surowiecki introduced the idea by recounting the following famous story.
In 1906, a British scientist named Francis Galton brought an ox to a country fair.🐂
He wanted to conduct a simple experiment.
Could any individual guess how heavy the ox was?🐂🐂🐂
Eight hundred fairgoers placed their bets.
Not a single one guessed the correct weight of 1,198 pounds.
But a funny thing happened when Galton compiled all the guesses.
While nobody guessed the actual number, the average of everyone's estimates was 1,197 pounds – 1 pound shy of the correct answer!🦉
Galton's surprising conclusion?
Opinions aggregated from a large group of individuals are generally more accurate than the opinions of any single expert.
(You can see a modern version of this remarkable phenomenon in this experiment conducted by the BBC, asking people to guess the number of jellybeans in the jar).
So What Does All This Have to Do With Investing?💰
Investors are forever searching for the "holy grail" – the one investment strategy that beats the market.☘️
Some investors swear by value investing, inspired by the remarkable success of Warren Buffett.
Others prefer the rapid gains of growth investing, looking to make a killing in the next Amazon (AMZN) or Netflix (NFLX).💰
Still, others would instead put their money to work by investing in blue-chip dividend-paying stocks. These are steady and reliable companies that pay increasing dividends year after year.
What do the advocates of each of these diverse approaches have in common?
Each believes they have unlocked the secret to making money in the markets.
And here's why I think they are all wrong- and right- in their own ways.
Why I Don't Believe in a Single "Better" Strategy
When I survey the investment landscape, I see a complex and changing world… a dynamic game of three-dimensional chess, a puzzle to be solved.💸
Specifically, I believe that each investment strategy has its day.
And the challenge is to combine the insights of all these strategies into a single investment portfolio.🦉🦉🦉🦉🦉🦉🦉🦉🦉🦉🦉🦉🦉🦉🦉
By doing that, you tap into the collective wisdom of a wide range of competing investment philosophies.💸
When the market is soaring, momentum investing rules.
When the market is choppy, conservative, low beta stocks are the place to be.
Of course, value investors remain stubbornly indifferent to Mr. Market's mood swings.
Based on the insight that no single strategy works all the time, I've developed my Microcap Moonshots portfolio.
Much like Galton, who asked 800 fairgoers what the ox's weight was, I test each stock against dozens of investment strategies.🐂
Think of it as the "wisdom of crowds" philosophy to individual stocks.
Specifically, my Microcap Moonshot portfolio invests in stocks that survive a rigorous selection process that screens for fundamental, technical, and macroeconomic analysis.
And I invest only in the very few stocks (maybe 10 out of a universe of thousands) that pass each of these criteria.
Is this approach perfect?
Of course not.🎲
However, it is remarkable how well combining diverse investment insights leads to a similar group of high-performing stocks.🦉🦉🦉
And if it’s something you’d like to try, sign up for my Microcap Moonshots Substack.
Keep an eye on your inbox.
I'll be adding more content and special reports over the coming weeks as I prepare to launch Microcap Moonshots as a paid investment service.