Behavioral Finance

Danger: the Only Safety

Stock market history features a litany of dangerous ideas and thinkers in the quest to know what others don't.

Yesterday's headline on MarketMinder's front page read:

"This nation will remain the land of the free only so long as it is the home of the brave."
- Elmer Davis

This is more than just a clever turn on an old saying.

The history of stock market development is defined by what we'd call "dangerous ideas." In fact, one of the only ways capital markets advance is through the generation of new ideas. It takes a good dose of bravery, and a lot of risk tolerance, to try out a new financial idea.

For an in-depth overview of the minds and ideas that made markets what they are today, Ken Fisher's book, 100 Minds That Made the Market, is a good start.

MarketMinder readers take it as axiomatic that to be a successful stock investor you have to know something others don't. If everybody knows something then it's got no power because it's already been acted upon and thus fully reflected in stock prices.

That's why you can't make any money using PE ratios. They've got no "dangerous idea" power. PEs are mundane, inane, and just sort of plain—everyone knows about them so they have no predictive power whatsoever. But once upon a time, when PEs were first thought of, they were a very dangerous, powerful idea.

Every great idea, particularly at its inception, is considered crazy. Outlandish, loony ideas are what markets are all about. Coming off the 231st birthday of the US, we spent some time reflecting on the nature of dangerous ideas. Most folks have a problem with dangerous ideas because they threaten the norm and explode whatever is established. A dangerous idea is about change, and that in itself is dangerous to most.

The founding of America was one of the great dangerous ideas in world history; today it's the most successful human experiment ever. Einstein's theories of relativity, which destroyed centuries of canonized scientific "facts" are today standard physical law. (And now even Einstein's ideas are being questioned!) Just 20 years ago the idea of buying a public firm with nothing but a bunch of high yield debt was simply ludicrous; today LBOs and private equity in general are booming as mainstream forms of investment.

But it's not all success. Danger can be seen as another word for risk. Risk defines the degree of potential return, but also the degree of possible failure. The funny thing about dangerous ideas that worked is there are just as many (actually, probably very many more) that didn't.

Edge (, the non-profit online organization seeking to bring together the world's greatest thinkers from all walks of life, puts out an annual book called What's Your Dangerous Idea? In it, each thinker presents his/her most dangerous idea in a page or so. It's some of the most provocative, out there thinking about the world you can find. Which of these ideas will work, which will fail? What are the economic and stock market implications?

Here's a link to this year's forward and afterword, by Stephen Pinker and Richard Dawkins. Both are concise meditations on the nature of new ideas.

And, here's a link to the book itself.

The really nice feature about free capital markets is that economic ideas don't need an "academic" arena for debate. All ideas are tested in the marketplace—and succeed or fail based on their potency alone. All that's required is someone with the courage to test their idea. The bad ideas die and the good ones become standard practice. It's a system promoting new wealth creation, greater efficiency, and aggregate societal benefit. Markets are, in essence, the playground of dangerous idea testing.

But the really important point is this: if you invest with tried, true, and common investing ideas—you're sunk from the beginning. Safety is the most dangerous investing idea of all. The only prudent investing idea is the "dangerous" one. And that in itself is a celebration of freedom.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.