First, I hate bees. I’m highly allergic and after a life-threatening sting sent me to the hospital, I endured shots for the past seven years to insure that I can take another sting in the future. I will likely need these shots every month for the rest of my life.
To my dismay, therefore, I recently learned that bees and humans make decisions in a similar way.
A recent Wall Street Journal article by Stanford School of Medicine professor Robert Sapolsky discusses how bees make decisions. For example, if two bees go to different locations to find food, they both return to the hive to let the other bees know their findings. The two scouting bees dance to indicate a successful grocery run; the length of the dance conveys the amplitude of the food source.
The other bees then buzz to each source – but twice as many go to the source that the longer-dancing scouting bee indicated. This food source is likely more productive. These additional bees come back and dance longer, helping even more bees pinpoint the richest food spot.
Social insects excel at what we’ve come to call the ‘wisdom of the crowd,’ in which a group of moderately informed individuals is more accurate than a lone expert.”
His point echoes a common question you and all investors need to answer: “Do I select only some individual stocks or securities that I as an expert believe are the best, or do I use the wisdom of the crowd when investing?” We stress that using the collective wisdom of the markets’ participants when choosing investments is wisest.
Next, “How do I as an investor know the collective wisdom regarding a particular publicly traded investment?” Easy: It’s the price of the security at any given moment. The market price already indicates the collective view of all participants to fix the price for all who want to buy and all who want to sell. The dance is in the numbers.
Just like the initial bees, investors worldwide already did due diligence on multiple securities in multiple global locations. They already determined the price they’re willing to pay for the risk associated with various securities.
Price indicates the most productive source of returns. This process allows an investor to confidently purchase a broad basket of securities without investigating each of the 10,000-plus stocks available in 45 countries. We prefer asset class investing in groups of similar securities and not trying to find mispriced (see “bargain”) securities, allowing us use of the collective wisdom of the marketplace.
Do you try to find every potentially great source on your own? Try instead the pooled wisdom of investors who already watched the dance and helped form the wisdom of the group.
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