Turn ∩ Temper Strategy
There are several facets to a pragmatic strategy for understanding markets and organizations (as well as groups in general):
- Leading minds and the kitchen cabinet. Most approaches to the study of leadership focus on personality attributes and historical background. In contrast, I prefer to focus on the leader’s cognition—judgment, decision-making, reasoning, rationale. Furthermore, leaders do not operate in a bubble and can be better understood as reflecting close concerns of confidants.
- Crowd madness. It is important to understand the leader, but it is also important to study the illogical mean (the followers who represent a range of biases) because crowd behavior can sometimes overwhelm the leader’s decisions, so it is important to study.
- Repeating patterns. Look to history for correlated examples of leaders and crowd behavior for guidance because history repeats, rhymes, etc. Also, seasonal patterns may show crowd behavior within certain industries or commodities.
Potential Opportunities
With respect to investment, opportunities appear across a range of markets, but these are the most common spaces where the approach described above is most effective:
- Small- and mid-cap companies. The smaller the company, the longer lever leadership may have to do things right (or wrong).
- Currencies and bonds. On the opposite end of the size spectrum, the leading minds of nations can have a major impact on a country’s policies, which can then impact rates.
- Short opportunities. Leading minds can often cause a lot of damage quickly. Consequently, looking for opportunities to short a particular stock, currency, or other instrument based on an analysis of leadership and crowd sentiment can be fruitful (but proceed with caution).
- Volatility. This is a very strong indicator of crowd madness at times, and one that progresses in repeated cycles.
- Spread opportunities. Spreads in commodities related to seasonal patterns can also indicate crowd biases repeating over time. Also, spreads are useful in comparative cases across companies or industries.
- Special situations. Areas broadly known as special situations including mergers and acquisitions, spin-offs, turnarounds, etc. can highlight the impact of leader decision-making patterns.
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