Crowded Out - Majedie

Crowded Out

Crowded Out

From tourist hot spots to identical Instagram posts, we are all suffering from FOMO. Tom Morris tells us how to avoid the crowds.

Reading time: 9 minutes.

Much has been written about ‘the wisdom of crowds’ — the idea that the collective actions and insights of a group of people can be more astute than any individual; that a group can be wiser than its members. We’ve seen a lot less consideration of the tyranny of crowds — where the cumulative actions of a group of people results in irrational and damaging consequences. Decisions that can be reasonable for an individual, when magnified by a crowd, can end up being very unwise indeed. One of the clearest examples of this phenomenon is in tourism. It is perfectly understandable for me to want to see Venice. I imagine visiting with my wife, strolling over the bridges, seeing St Mark’s Square, and having a great time. The problem is that millions of other people have had the same idea — narrow bridges are rammed with tour groups, the quaint Italian shops I imagined have been replaced by identikit souvenir hawkers, and the carnival masks are imported from China.

Cruise ships in Venice have become a major source of frustration for locals, with cruise passenger numbers rising from below 400,000 in 2000 to over 1.5 million in 2018. After a crash earlier this year between a cruise ship and a small boat there are now efforts to move the cruise terminal and restrict ship sizes. The ‘must-see’ parts of the city — St Mark’s Square, the Accademia, the Rialto Bridge — are now so mobbed during the day it can be hard to move. Curiously, large parts of the rest of Venice remain very quiet, as the city’s population has dwindled to barely 60,000, half what it was in 1980. 24 million tourists each year have driven the locals away, changing Venice from a living city into one that is part theme park, part ghost town.

Dubrovnik in Croatia and Kotor in Montenegro are also facing problems with cruise ships. Kotor, a small town of 14,000 residents, now hosts 500 cruise ships a year, bringing in more than 500,000 tourists, ten times more than in 2003. The mayor has announced a plan to charge visitors €2 for coming ashore — other cities will surely follow.

The Mona Lisa is on the bucket list of most travellers, and so as the global middle class has grown, and with it the number of international travellers, so has the popularity of this small, 30” tall painting. Currently hanging in a temporary space at the Louvre while its usual gallery is renovated, it is so popular that visitors are only allowed into the viewing pen in groups, given one minute to look at the painting (if they can see over everyone else’s phones and selfie sticks) and then ushered out by security before the next group enters. This seems unlikely to be the viewing experience that most people would have imagined when planning their trip — one disappointed attendee told the New York Times “it’s like cattle to the abattoir”. When constrained supply (a single work of art) meets extreme, and growing, demand (the Louvre attracted 10.2 million visitors last year, the most for any museum in history), the result is a bad experience for everyone.

A business would increase prices until demand was reduced to more manageable levels, but as a museum, the Louvre has a public service remit that limits its ability to do this. Timed entrance tickets and longer opening hours may help, but fundamentally it is an unsolvable problem.

So where can you go, to escape the crowds? Where is remote enough to provide a true escape? The highest point on Earth? Think again. Climber and twitter user Nirmal Purja (@nimsdai) posted a photo of the queue for the summit of Everest in May this year, showing a long line of tired climbers jostling to get to the peak. Waits of 1-3 hours are now quite common. This makes the climb significantly more dangerous for everyone involved, as people above 8,000m spend more time in the so-called ‘death zone’, with limited oxygen supplies and very little room to move. Many end up making fraught choices between abandoning their climb and trying to move back along the narrow queue and pushing on while risking their (and their guides’) lives. Ten people died in this year’s climbing season by May, well above the 20 year annual average of six — crowds have made the mountain less enjoyable, and far riskier. Evidence of the groupthink of crowds is easy to find on services like Instagram, where certain photo compositions have become overwhelmingly popular — think images of people with their back to a decorated wall, looking to their side, or of tourists in hats looking out on an aspirational landscape. An account (@Insta_repeat) catalogues these photos, grouping dozens of similar shots together, each one taken with some expectation of originality, but in reality part of a virtual crowd.

Putting tourism to one side, the crowding of cities with residents can lead to intense social pressures as living space is reduced to unbearably small levels. The average new home size in Hong Kong is just 484sq ft (source: Shrink That Footprint), the smallest in the world, less than a quarter of the size of the average new home in the US, and almost 40% smaller than the average flat in Manhattan (704sq ft, source: A recent Hong Kong development, One Prestige, offers flats of between 160-170sq ft, at prices ranging from HK$3.9-4.8m (£400k-£500k). Many residents, unable to afford the sky-high rents for even a small flat, end up living in sub-divided properties, often with as little 50sq ft per person — equivalent to roughly half a car park space. The attractions of Hong Kong — its vibrancy, melting pot of cultures, and position in the global business world — have led to crowding which has pushed up the cost of dignified living to levels that are unattainable for large parts of the local population. This has played a role in the recent unrest, as young people feel that they have little to lose. Everyone’s desire to live the ‘Hong Kong Life’ has led to that life, and even a much more modest one, becoming out of reach for most Hong Kongers.

Finally, the tyranny of crowds is plain to see in the world of investment. In bonds, a clamour for safety, helped along by central banks’ rhetoric, sent the yields on $17tn of bonds into negative territory at the end of August, up from $6tn in October 2018, and essentially nothing before 2012. Why do investors buy bonds that guarantee losses if held to maturity? In some cases it’s because they worry they might lose more in any other investment. In many cases though, it is a herd mentality along the lines of ‘yields have been heading down for months, and so if I buy now, I should be able to sell the bond on to someone else at an even more absurd price in the future, after yields have become even more negative’. Fear Of Missing Out (FOMO), the same feeling that drives people to join the crowds in all the places they’ve seen on Instagram, also haunts investors worried about missing out on a rally. The sense that other people are benefitting from something that you might be missing out on serves only as a magnet to grow the crowd further — you can hear that feeling lurking behind the words of an investor quoted in the FT in August: “There’s a risk that you will never get a positive yield on a safe asset again — so buy them now while stocks last”.

Crowding in investments can also destroy the qualities of the investment that attracted the crowd in the first place — if everyone seeks ‘safety’ in the same small set of companies, forcing up their share prices and valuations to irrationally high levels, then those investments are no longer safe at all. High valuations transform steady businesses into high-risk investments. At the moment, the crowd seems most attracted to the shares of businesses perceived as being ‘high quality’, ‘low volatility’ and ‘capital light’. Those qualities have become so fashionable with investors that companies displaying them have seen their valuations bid up to the highest levels relative to the market since the peak of the 2000 bubble (source: Exane BNP Paribas). Investors who have stood apart from the crowd and kept a cool head on valuations have been left behind. People only have so much patience for missing out, and so over time more and more get sucked in to buying the same narrow group of stocks, since those are the ones that have performed the best recently. This is the driver behind the rapid growth of thematic ‘quality’ funds in the UK and elsewhere.

The stock market’s current predicament is more complex than just ‘growth’ vs ‘value’, since many disruptive growth companies have also been shunned, as the volatility of their growth makes them unpalatable for people whose only focus is short-term performance. Equally, many very low-growth companies are regarded as ‘high quality’ by investors because the meagre growth they do show is consistent. The real story in the market is one of crowding driven by fear of the ‘unpredictable’ short term, which ironically is one of the worst ways to actually protect yourself in the long term.

The damage that crowds can do to companies goes beyond just pushing up valuations to unsustainable levels. Pressure is also frequently applied to management teams to take short-term measures to boost further the share price, often in order to please new shareholders with short investment horizons. Typically, this takes the form of cutting back on legitimate business costs like capex and research and development in order to temporarily boost margins and fund share buy backs. Taking on a lot of extra debt is also a favourite. In the same way that hordes of tourists can destroy the character of an attraction as it morphs from being a living place to a pseudo-theme park, the demands of new short-term investors can damage the long-term foundations of a business. The problems created by such demands — a slowing pace of innovation and loss of market position —often only become apparent a few years later. Look at the damage done at Kraft Heinz by the actions of shareholders desperate for higher margins — the share price initially rose over 30% in the couple of years after the IPO, but then fell 70% as sales fell and margins had to be reset lower, with a levered balance sheet looming in the background. We would view this as ‘capitalism’ at its worst.

Crowds can inadvertently destroy the thing they are looking for, whether that’s an intimate experience with a painting, a romantic visit to a city, a mind opening climb to the top of the world, a positive yield on a bond, or a ‘safe’ investment in shares. Even if each person is individually behaving sensibly and rationally (which is itself debatable!), the overall crowd can still wreak havoc, spoiling the situation for everyone. In our experience, when you see a crowd, it’s best to look elsewhere.


Tom Morris