There are few things as fascinating as repetitive error in human thinking. When monetary consequences are assigned to these mental errors, it amplifies the fascination factor as emotions get involved. When emotions get involved a curious thing happens to people: They descend into group thinking, where they find the most comfort.
It doesn't matter how many times history has told these individuals that group thinking will result in an average output at best and a far below average output at worst. It doesn't matter how articulate or persuasive the argument to stand away from the group might be. The comfort of company that is aligned in thought rests so deeply in the human psyche that pulling an individual away from such a pseudo-gratifying circumstance is observed as reckless.
Take, for example, the case of Facebook stock when it IPO'd a couple years back. Professional Wall Street was horrified by the prospects of a social media company with such a steep valuation coming to the market. It was seen as a sign of "the bubble" returning. You know, that bubble that Wall Street has seen a few times over the past 15 years and now randomly assigns the label to anything that comes up.
It is similar to a hairy guy, with his shirt off, walking through the woods in the Appalachians. You will be mistaken for Bigfoot 9 times out of 10. On Wall Street, bubbles are the Bigfoot of finance. People think they know what they know what they look like, but are unsure if its a real Bigfoot until their Birkenstocks fly off with toes attached.
Mark Andreessen, who by the way, is probably one of the best follows on Twitter, posted a fascinating number of articles about the pessimism regarding Facebook before the IPO. Here is the list of articles he cited:
2007: "Irrational exuberance ... Facebook is being valued by investors at nearly half the value of Yahoo ... bubble." http://www.nytimes.com/2007/10/17/business/media/17bubble.html?pagewanted=all&_r=0
2008: "Social networking will become a ubiquitous feature of online life. That does not mean it is a business." http://www.economist.com/node/10880936
2009: "The prospect of a Facebook death spiral is very real." http://gawker.com/5152040/facebooks-value-37-billion-and-dropping
2009: "One can argue that Facebook is probably worth far less than the aforementioned $3.7 billion." http://mashable.com/2009/02/11/facebook-valuation-3/
2009: "Famously overvalued Internet start-up businesses: $15B value for Facebook, $2.6B valuation for Skype..."
2010: "Facebook's $56 Billion Valuation Smells Like A Scam To This Guy" http://www.businessinsider.com/buyer-beware-facebooks-56-billion-valuation-smells-like-a-scam-to-this-guy-2010-12#ixzz38ZCaG8fn
2011: "Facebook's stock price will drop more steeply than any other company's in history." http://www.businessinsider.com/facebook-valuation-2011-4
I'll add one that I remember vividly myself from shortly after the time FB IPO'd in what is emblematic of hedge fund research in this era: $4 target price on FB by a hedge fund analyst https://sumzero.com/headlines/technology_and_software/FB/97-short-call-on-facebook-fb-4-price-target
All the meanwhile, back at the Hall of Justice, I was putting together the first of a series of articles that would go into how FB was behaving exactly as YHOO did following its IPO, with very similar sentiment attached. This from August 2012 https://www.zenolytics.com/2012/08/facebook-is-the-next-yahoo-and-that-makes-it-very-bullish/
This follow up piece from September 2012 https://www.zenolytics.com/2012/09/the-astounding-similarity-between-the-yahoo-ipo-and-facebook-ipo-continues-to-be-astounding/
The issue here, at its essence, is that Wall Street believes fervently in Bigfoots. This belief doesn't allow investors a comfortable position from which they can make rational decisions. The tendency leans heavily towards a conviction that since so many encounters with monsters have occurred since 2000, everything we are seeing to this very day is a monster.
Every rally. Every social media company. Every tech company. Every commodity. Every new high. Every sign of optimism in the economy. Mergers. Acquisitions. Institutional optimism. Regardless of the circumstance or the reality thereof, it is simply regarded as a Bigfoot lurking in the forest, carrying a Cherry Coke it discovered in Eustace's mountain cabin.
The ability to breakaway from this mentality, embracing reality instead of perceptions is what will separate those who are able to perform consistently from those who don't. The magic in every bear market is that it compels investors to remain skeptical of positive circumstances that develop in future bull markets. It creates a delayed reaction in investors to such an extent that by the time they distance themselves from the Bigfoot mentality, they have unknowingly waded right back into the den of the beast, buying into the market when it is mature.
Facebook, in all of its controversy, disbelief and skepticism has been and will continue to validate the Bigfoot mentality. It is only when investors believe that the monsters haunting their thoughts never existed in the first place that the markets will go out of their way to remind them that Bigfoot will always have a home on Wall Street.
