Skip to main content
The Globe and Mail
Get full access to globeandmail.com
Support quality journalism
Just $1.99 per week for the first 24weeks
Just $1.99 per week for the first 24weeks
The Globe and Mail
Support quality journalism
Get full access to globeandmail.com
Globe and Mail website displayed on various devices
Just$1.99
per week
for the first 24weeks

var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){console.log("scroll");var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))}pencilInit(".js-sub-pencil",!1);

Those of us who hold Canadian stocks or have watched houses in our neighbourhood soar to previously unthinkable prices wonder if we can time things perfectly and sell at the top. It could be our time in the sun. Or we could get royally burned at our own barbecue if we get caught in a plunge.

How can you tell when the best is over? Economists and financial analysts offer lots of insight, but no definitive answers. Fortunately, big-brained theorists in other disciplines have pondered similar questions, and I think you can apply their theories profitably to the markets.

Take Quentin Michard, a researcher at the School of Industrial Physics and Chemistry in Paris, and Jean-Philippe Bouchaud, a PhD in physics who works at the French Atomic Energy Commission. In one study, they looked at synchronization in social and economic behaviour. Michard and Bouchaud argue that the users of any free-market economic system make decisions based on personal opinion, public information and social pressure or imitation. Those social influences are often the most critical.

Story continues below advertisement

The duo crunched three sets of data to test their theory: European birth rates from 1950 to 2000, cellphone adoption rates in Europe between 1994 and 2003, and how long audiences clap at the end of concerts before heading for the exits-literally.

The birth rates declined substantially in the postwar decades, and Michard and Bouchaud say that is the result of long-term social trends, including birth control and the decline of religion. Cellphone use has grown rapidly. The duo say some of that is due to immediate social influences: feelings of inferiority if you don't have a phone, and the phones getting more useful when others have them too. When do audiences stop clapping? Most of us stop quickly when others around us stop. You don't want to be clapping alone.

I've applied Michard and Bouchaud's theories in my own far-less-rigorous studies of three recent market trends: the spread of monster homes, the huge run-up in commodity prices and the frenzy over the Tim Hortons share issue last March.

The average size of a house built in Canada in 1976 was 1,100 square feet. In 2004, it reached 1,800 square feet. Yet the average size of a Canadian family declined to three people in 2004 from 3.5 in 1976. So why have so many families bought monster homes? Social pressure.

My prediction: Over the next 20 years, other social pressures, such as our aging population, will prevail. Monster homes will be replaced by smaller ones with ramps for our walkers. Should you sell your big-box house now? Probably not for another three to five years.

As for stock-market and commodity-price cycles, a couple of years ago, Howard Balloch, Canada's former ambassador to China, showed me a chart of Chinese nickel demand and domestic supply. It indicated a shortfall of supply stretching far into the future. I bought shares in Inco. My prediction: The nickel boom will last quite some time, but there will be bumps.

Doughnuts are different. I can't turn around in downtown Toronto without seeing a Tim Hortons. Here's a market where supply is obviously meeting demand, so the frenzy around the "new" share issue was just too intense.

Story continues below advertisement

Yet I still haven't figured out exactly when to get out of the stock market. It sure looks frothy-people talk about their portfolios as if they were family members. It reminds me of a New Yorker cartoon called "What lemmings believe," which showed the little rodents running en masse to a cliff and taking off in free flight.

Last year, three researchers at Columbia University-Matthew Salganik, Peter Dodds and Duncan Watts-created a pop music internet site. It asked visitors to rate unknown bands. The researchers were trying to see how opinions are formed.

Some visitors could only hear songs on their own. Others could see what songs other listeners downloaded. As expected, they were affected by what others did. The quality of the songs had some impact, but what is scary for investors is that the more socially influenced the listeners, the more unpredictable the result. The "best" songs didn't do badly among any listeners, and the "worst" songs didn't do very well, but the stuff in the middle was a crapshoot.

So, based on all the studies, I have some thoughts on how to get in and out of the market: Buy only quality stocks that aren't the subject of mass opinion-in other words, out-of-favour stocks. Avoid comparative evaluations of hot stocks, like saying RIM or Apple isn't all that overvalued relative to its peers. Finally, to make big money, you have to sell when everyone is talking about your investments. Or, as at a concert, clap along with others for a while, then dash for the doors.

Tell us what you think

Report an error
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies