Cargo cult investing

Cargo cult is a failed belief system that influences many spheres of our lives, including investing

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Discussing stock investments nowadays is like talking about cricket on the morning after the Indian team has lost a big match. Therefore, I'm going to write about something completely different, something called a cargo cult. A cargo cult is a set of quasi-religious beliefs that have arisen in primitive and previously isolated societies after they come into contact with a more materially advanced civilization. The most well-documented cases of the rise of cargo cults have been in those islands in the Pacific Ocean where Japanese and Allied forces set up bases during World War II. From the perspective of the island's original inhabitants, the sudden changes that happened must have seemed magical.

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Japanese or Allied soldiers arrived with a huge number and variety of objects which appeared to operate by magical means. They arrived in giant ships, unloaded huge mechanical animals and set about constructing mysterious structures including vast strips of flattened land. Then, even more wondrously, flying machines landed and disgorged even more men, material and equipment.

Some of the food, clothing and tents were also given to the local population who were helping. These materials seemed to be magical because there appeared to be no way in which it could have been made. However, unlike colonial or trading contact, all this vanished as suddenly as it appeared. In August 1945 the war in the Pacific ended, the bases were quickly abandoned and the 'cargo' stopped arriving.

It was then that the cargo became a cult. In order to get the cargo to start arriving again, the islanders started imitating the actions that they had seen the soldiers take. They made equipment look-alike from materials available to them. They made wooden headphones and radios and lit fires in the pattern of landing lights on the runways. They even built life-size models of airplanes and lined them up on the runways in order to attract more airplanes. They sat in abandoned control towers with wearing wooden headphones and spoke into wooden microphones. But the cargo never came again. Over the next few decades all but a handful of the cargo cults disappeared. However, the English word 'cargo' entered the language on many islands. The evolutionary biologist Jared Diamond mentions in his book Guns, Germs and Steel that the word cargo was used as a synonym for wealth. If you wanted to say that a family was rich, you said that they had a lot of cargo.

The term 'cargo cult' seems to have entered the English language as a concept signifying such behaviour in other fields. I first came across the term when a techie I know used the term to derisively describe another programmers' software work as 'cargo-cult programming'.

Which brings us to what I'd like to call cargo-cult investing. Now, if and when the stock markets' long bull-run ends, many investors will develop the same frame of mind as the islanders did after the soldiers left at the end of the war. The cargo will be gone, but people will try to figure out how to bring it back. Many things could happen from here on, but going through the same motions that we used to will probably be as ineffective as it was for the followers of the original cargo cults.

This story was first published in June 2008.

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