Peter Lynch: The Cocktail Party Market Indicator
An interesting phenomenon I have observed in the past few year of participating in the crypto and stock markets is that the average person’s interest in these markets is directly correlated with the price of the markets. For example, the first hype train in crypto currencies, specifically Bitcoin in 2016–2017 drew may new investors after the price has soared. The media is regularly reporting about the price action of Bitcoin on the daily evening cable news. Fast forward a few years to early 2021, GameStop and the meme stock hype train, has seen the same increase in price followed by a huge interest towards investing amongst people who never shown an interest before. Many young people joined the markets and online forums such as Wallstreetbets and Superstonks on the website Reddit to try and profit from this craze. According to Robinhood, the main stock broker among GenZ and millennials, it saw 6 million new accounts opened in 2020 which was a 137% increase from the year before, and one million of those new accounts belong to investors with an average age of 19. Conversely, as the price of the markets decrease, many people who originally participated either felt jaded for buying the asset at the top or lost interest in investing because the price has declined or stayed the same. Coincidentally, when I read the book One Up On Wall Street by the legendary investor, Peter Lynch he mentioned observing the same phenomenon as me.
“If the professional economists can’t predict economies and professional forecasters can’t predict markets, then what chance does the amateur investor have? You know the answer already, which brings me to my own ‘cocktail party’ theory of market forecasting, developed over the years of standing in the middle of living rooms, near punch bowls, listing to what the nearest ten people said about stocks.
In the first stage of an upward market — one that has been down awhile and that nobody expects to rise again — people aren’t talking about stocks. In fact, if they lumber up to ask me what I do for a living, and I answer, ‘I manage an equity mutual fund,’ they nod politely and wander away. If they don’t wander away, then they quickly change the subject to the Celtics game, the upcoming elections, or the weather. Soon they are talking to a nearby dentist about plaque. When ten people would rather talk to a dentist about plaque than to the manager of an equity mutual fund about stocks, it’s likely the market is about to turn up.
In stage two, after I’ve confessed what I do for a living, the new acquaintances linger a bit longer — perhaps long enough to tell me how risky the stock market is — before they move over to talk to the dentist. The cocktail party talk is still more about plaque than about stocks. The market is up 15 percent from stage one, but few are paying attention.
In stage three, with the market up 30 percent from stage one, a crowd of interested parties ignores the dentist and circles around me all evening. A succession of enthusiastic individuals takes me aside to ask what stocks they should buy. Even the dentist is asking me what stocks he should buy. Everybody at the party has put money into one issue or another, and they’re all discussing what’s happened.
In stage four, once again they’re crowded around me — but this time it’s to tell me what stocks I should buy. Even the dentist has three or four tips, and in the next few days I look up his recommendations in the newspaper and they’ve all gone up. When the neighbors tell me what to buy, and then I wish I had taken their advice, it’s a sure sign that the market has reached a top and is due for a tumble.”
-Peter Lynch
As Warren Buffet says: “be fearful when others are greedy, and greedy when others are fearful.”
