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Kass: Keep Clear of the Consensus

"In ambiguous situations, it's a good bet that the crowd will generally stick together -- and be wrong."

-- Doug Sherman and William Hendricks

While the crowd usually outsmarts the remnants, accepting the consensus is, nonetheless, often a dangerous course of action.

-- Real Money's Kate Stalter also has thoughts on why pundits don't work for you.

The 25% rise in valuations (P/E ratios) in 2013 caught the consensus flat-footed.

At the beginning of this year the Nikkei was the most preferred regional stock market, interest rates were to rise, the U.S. stock market was to climb by 10%, utilities and bond-market-equivalent sectors were the least liked groups, high-beta (growth) was the most liked group, and domestic economic growth was to accelerate.

The new consensus is that the Asian markets are unattractive, interest rates will retreat ever further, the U.S. stock market is breaking down, bond-market-equivalent groups will continue their outperformance, high-beta (growth) stocks should be unrewarding and the domestic economic recovery will be listless.

This is a constant reminder that, especially as it relates to investments, the only certainty is the lack of certainty and that the consensus can be injurious to your investment well-being -- particularly at inflection points.

Moreover, any investment talking head who possesses self-confident projections (especially given the inherent instability of a system that has relied on monetary policy to artificially influence bond and stock prices and that has limited natural price discovery) should be locked in a closet away from children and investors who sometimes act like children.

Bottom line: If you are beholden to consensus, Mr. Market could punish you for it.

Beware of the unexpected, drop dogma, and always consider the contrary.


This column originally appeared on Real Money Pro at 7:22 a.m. EDT on May 21.

At the time of publication, Kass and/or his funds had no positions in any stocks mentioned, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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