Understanding Public Opinion
Investors need to understand public opinion. We have plenty of information from polls, but how can we use this to our advantage?
This is a complex subject, which will be a major chapter in the book in progress that forms the basis for our work on "A Dash."
Our purpose here is to get the topic going with a few observations. Each idea will be amplified and supported in future articles. Let us start with these thoughts.
Characteristics of Public Opinion
It is a fundamental characteristic of the American democracy that people hold and express opinions. It seems to be a lack of knowledge or citizenship to say, "no opinion" so polls register anything. People love to opine about subjects that are shared by everyone. It explains many reactions to political events. Here are some examples:
- Sex scandals. This is a staple of political information. Since everyone has experience with sex, extra-marital affairs, and the like, opinions are all equal. This explains why people are aggressive consumers of this information. It makes sense to them. Since mainstream media writers understand this, it is a natural subject.
- Family issues. The current controversy about Governor Palin's daughter's pregnancy is typical. This is something that everyone can understand. Many have experienced a similar question. Everyone has an opinion, and all opinions are equal.
- Government. People love to criticize government. Will Rogers made it a staple. There is an interesting disparity, however. For many years people have held Congress in low esteem while supporting their own Congressional Representative. This is something we have followed for decades. The responsibility does not transfer to one's own representative — a disconnect between the macro and the micro, if you will.
- Economic circumstances. People responding to polls give quite different answers when asked about their own situation and that facing the nation. The former reflects what they actually know. The latter reflects what they read in the newspaper.
Some Interesting Evidence
Mark Perry of the University of Michigan (now added to our featured sites) does some great work on this topic reported on his blog, Carpe Diem. He recently noted an important disparity in public opinion on the economy–and he cited some good evidence. Mark writes as follows:
here's the bad news for the dour Democrats in Denver — most Americans
don't share their economic pessimism. That's the finding of public
opinion expert Karlyn Bowman of the American Enterprise Institute.
"Most Americans are feeling pretty good about their jobs and their
personal lives," she says after investigating the fine details of
recent polls. Her report goes right to Mr. Gramm's concern about the
gap between actual economic performance and the dreary negativity of
politicians and the media.
accounts for the gap between people's attitudes about their own lives
and the economy in general? Bowman replies: "The relentless negativity
of the media."
He goes on to cite data supporting this viewpoint from Stephen Moore, writing in the Wall Street Journal.
At "A Dash" we do not take a partisan political position. We form opinions on the economy based upon evidence. This is going to be difficult during political seasons, since every reader interprets information through the prism of campaign rhetoric.
Our mission is to get good investment returns regardless of which party or candidate succeeds. We have political opinions, but put them aside when making investment decisions.
What we find valuable is any information that helps us to interpret sentiment and market reaction. Our conclusion, based upon long experience, is that public opinion is good when describing personal circumstances and poor when reacting to news. The average citizen either reads news on politics or the economy, or gets information from a more informed friend. Public opinion is not a good indicator of general macro trends and certainly not a measure of actual economic indicators like inflation or economic growth.
Any investor who understands this can profit. It is simply a case of knowing when to "fade" the general public sentiment. After all, the average investor grossly underperforms the market. What better indicator could you seek?