Serious Money: Most people involved in the investment world will always try to benchmark their own views against what "the market" thinks.

There are various ways of gauging market sentiment, some more formal than others. One or two large investment banks, for example, commission independent surveys of institutional investors, which ask questions about markets and economies in an attempt to gauge the current consensus. The results are often kept secret but sometimes leak out into the press.

Less formally, many investors carry around perceptions of what everybody else thinks, perceptions that may or may not have anything to do with reality. Conversations over the water cooler can hardly be described as a scientific survey of market opinion.

Why all this effort to make guesses about other people's opinions? Keynes famously argued that investing was less a game about "fundamental" determinants of asset prices - things like profits and dividend yields - and more about gauging popular opinion. He reckoned that a successful investor should imagine that he is trying to guess the outcome of a beauty contest: what is important here is the opinion of the judges, not the intrinsic qualities of the contestants.

A company may, or may not, have a great profits outlook. What is more important is what the market thinks about that outlook. Bet on the bets made by others and you will make money.

The beauty contest metaphor has been adapted and extended in many different ways. It goes some way to explaining why asset prices can depart from fundamentals for long periods of time. Such theorising helps to explain why chartists and trend followers still hold such sway over many different markets.

Modern academics who have developed complex "behavioural finance" theories to explain some of the peculiarities of financial markets owe an intellectual debt to Keynes. At the end of the day, many investment decisions use as an input an opinion about the market consensus.

If we can make a sensible stab at that market consensus, what are we to do with this information? One possibility would be simply to do the same as everybody else. We might do this in complete ignorance of the fundamentals, taking a free ride on the analysis done by everybody else. This, of course, assumes, that everybody else is capable of sensible, rational analysis.

Alternatively, we could adopt the "greater fool" theory, which assumes that many market participants are not exactly rocket scientists when it comes to investing and are capable of making extremely ill-informed choices. Nevertheless, because there are so many of them, they can have a profound impact on asset prices.

The trick here is to spot the times when the intellectually challenged hold sway over markets and to be confident enough in our own abilities to get out before they do. Suffice to say, there are not too many documented examples of anyone building a successful fund management business based on this approach to investing.

Another, more popular approach, is to adopt a contrarian style of investing. In other words, find out what everybody else is doing and do the complete opposite. At first sight, this might seem to be another methodology that assumes that everybody else is an idiot. But it might also be the opposite: once all available news is in an asset price the only thing that can affect it is a surprise. And, if the consensus is surprised, it is rarely good news.

Again, there is little scientific evidence to support the contrarian investment style, although it has to be said that many us often try to distinguish our views as being very different from the herd. I guess that is because commentators and analysts like yours truly are in the market place for ideas: part of the game is, obviously, an attempt to differentiate our products.

Product differentiation itself contributes to the nuttiness of market behaviour. Because analysts have to shout very loudly to get heard, it doesn't make an awful lot of sense for them to roar at the top of their voices "I have a boring, middle-of-the-road consensus view". The temptation to depart from the perceived consensus can be awfully strong.

Incidentally, I think it was this kind of motivation that drove many analysts into the extreme positions adopted during the bubble years. Elliott Spitzer may have uncovered a lot of illegal activities but there was a more mundane explanation: opinion inflation was rife.

How does the ordinary investor establish the current consensus and distinguish between the serious analyst and the hack commentator? Like many aspects of the investment decision, this requires a lot of work. With regard to the analysis of analysts it often pays to look at their track record. If someone has a history of making extreme market calls, simply to distinguish themselves from the crowd, it should go without saying that such people should be ignored. An analyst's ability to make good calls can be relatively quickly established.

What of the current consensus and who is shouting the loudest? Many people are rushing to become ever gloomier about global growth and are downgrading expectations for stock markets. One or two commentators of the more apocalyptic persuasion are claiming that the end of the world is in sight, again.

The contrarian in me wants to take the opposite view but my awareness of the market power of bigger fools suggests that caution might be the order of the day for the near term.

Chris Johns is an investment strategist with Collins Stewart. All opinions are personal.