"Why is it important to understand investment crowds? I have argued that large investment crowds are associated with significant market mistakes, situations in which the price of a stock, bond, or commodity is forced too high or too low relative to its fair value. If this is true, then a speculator can potentially earn above-average returns by exploiting this connection. One need only watch for the emergence of an investment crowd. As the crowd grows, it makes sense to invest in harmony with the crowd’s investment theme. But eventually the crowd grows so large that it forces the market price well past fair value. At this point the investor needs to either step aside from the crowd’s theme investment or even invest in an opposite theme."
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