Investing With the Wisdom of Crowds

Original post

Editor’s Note: Below, Nicholas explores “the wisdom of crowds” – how “the many” are much more accurate than “the few.”

And he knows how to
apply this logic to your portfolio
.

Nicholas’ expert guidance is 100% at your service in his new
Oxford Wealth Accelerator trading service
.

So the wisdom of crowds (and Nicholas) do the work for you.

– Katherine Koman, Assistant Managing Editor


Are you familiar with the TV show Who Wants to Be a Millionaire?

At its peak, it had nearly 30 million viewers in the U.S. alone.

Versions were produced in 90 countries, ranging from Afghanistan to Vietnam.

And the U.S. version is still running – currently in its 21st season – and chugging along as a popular syndicated program.

One of the most famous parts of the game is the “lifeline.”

Whenever a contestant is stumped by one of the multiple choice questions, he or she can use one of three lifelines to make the question a little easier to answer.

The “50:50” lifeline eliminates two of the wrong answers. “Phone-a-Friend” allows you to call someone at home for help. And “Ask the Audience” polls the studio audience to see which answer they think is correct.

Which lifeline, then, is the most reliable?

50:50 doubles your odds.

Phone-a-Friend produces the right answer 65% of the time.

But Ask the Audience produces a correct answer 91% of the time.

In other words, polling the audience almost guarantees a right answer.

The conclusion?

The crowd is wiser than each individual “expert.”

The Origin of the Wisdom of Crowds

James Surowiecki popularized the “wisdom of crowds” concept in his 2004 book The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies, and Nations.

Surowiecki introduced the idea by recounting the following famous story…

In 1906, a British scientist named Francis Galton brought an ox to a country fair. He wanted to conduct a simple experiment…

Could any individual guess how heavy the ox was?

Eight hundred fairgoers placed their bets.

Not a single one guessed the correct weight of 1,198 pounds.

But a funny thing happened when Galton compiled all the guesses.

While nobody was able to determine the actual number, the average of everyone’s estimates was 1,197 pounds – 1 pound shy of the right answer!

Galton’s surprising conclusion?

Opinions aggregated from a large group of individuals are generally more accurate than the opinions of any single expert.

So what does all this have to do with investing?

Let me explain…

Investors are forever on the hunt for the “holy grail” – an investment strategy that consistently outperforms the market.

Some investors swear by value investing, inspired by the remarkable success of Warren Buffett.

Others prefer the rapid gains offered by growth investing, looking to make a killing in the next Amazon or Netflix.

Still others would instead put their money to work by investing in the Dividend Aristocrats – steady and reliable companies that increase their dividends year after year.

What do the advocates of each of these diverse approaches have in common?

Each believes they have unlocked the secret to making money in the markets.

Why I Don’t Believe in a Single “Better” Strategy

When I survey the investment landscape, I see a complex and changing world… a dynamic game of three-dimensional chess, a puzzle to be solved.

Specifically, I believe that each investment strategy has its day.

And the challenge is to combine the insights of all these strategies into a single investment portfolio.

If you do that, you tap into the collective wisdom of a wide range of competing investment philosophies.

In short, you’re applying the wisdom of crowds to investing.

Based on this insight, I developed
Oxford Wealth Accelerator‘s Strategic Portfolio
.

The
Strategic Portfolio
consists of 10 competing investment strategies – each of which has a track record of outperforming the S&P 500 over time, but in very different ways.

I believe each investment strategy has its day.

When the market is soaring, momentum investing rules.

When the market is choppy, more conservative Dividend Aristocrat stocks are the place to be.

Meanwhile, value investors remain stubbornly indifferent to Mr. Market’s mood swings.

Subscribers to my new
Oxford Wealth Accelerator
trading service gain access to a portfolio of these diverse strategies represented by low cost and liquid exchange-traded funds.

Recently, I’ve taken this insight one step further…

By applying this same “wisdom of crowds” philosophy to individual stocks and options.

I’ll be discussing this exciting new approach in an upcoming column.

Good investing,

Nicholas