Herd behavior has its benefits. Back in our hunter-gatherer days, moving in herds and working as a group provided protection, comfort and improved the likelihood of hunting success. “Herding” also promoted the sharing of ideas, knowledge, and resources.
Members of the herd with knowledge of prime hunting locations combined with other members skilled at weapon-making can benefit from maximizing their chances of survival.
Herd behavior also has its drawbacks – when members are too dependent on the herd and develop a false sense of security. The herd mentality can do no wrong and can lead to dire consequences when herd behavior becomes mob mentality. When this happens, individuals start to do things as a group they usually wouldn’t do independently.
The mob takes on a mind and life of its own. People soon lose control of their usual inhibitions and their ability to think for themselves, and before you know it, everyone’s grabbing their torches and pitchforks and storming the castle.
In investing, mob mentality has been responsible for multiple bubbles and market crashes, including the dot-com boom and the mortgage-backed securities debacle. It doesn’t help when so-called experts, cable news, and social media all hop on the bandwagon and are part of the problem.
I would say that Investors’ biggest mistake is going along with the mobs. I would also say that the second biggest mistake is not learning from past mistakes. Investors are currently fueling the stock market and Bitcoin highs.
The problem is, there are no concrete underlying economic fundamentals to support these highs. In other words, the stock market frenzy and crypto frenzy are being fueled by pure speculation.
Take, for instance, the latest headlines surrounding Bitcoin:
“Bitcoin could hit $70,000 in December …”
“Bitcoin Powers Past $57,000 On Its Quest To Hit A New All-Time High …”
“Why The Price Of Bitcoin Will Break Out To New Highs Soon.”
History has not been kind to the speculation-fueled stock market, and even Bitcoin surges. Remember in early 2018 when Bitcoin shed 65%? Not many investors do. The mistake investors make during every bubble is the belief that somehow it will be different this time. It never is.
Investors’ most significant problem with following the herd is their judgment gets clouded. They stop thinking for themselves. Not all investors are this way. While some investors rush into stocks and crypto, other investors go in opposite directions.
While the mob doubles down on stocks and crypto, the savvy high-net-worth (HNW) investors and institutional investors see the writing on the wall and are preparing for a crash and inflation. They’re allocating to tangible cash-flowing assets considered essential that perform even in a downturn and even in an inflationary environment.
People won’t cease needing essential goods and services like food, shelter, and fuel in hard times. Louis Vuitton handbags become dispensable during downturns as consumers become more discretionary with their spending, but food, shelter, fuel, and transportation will remain at the top of every budget.
How can investors avoid being swept up by the herd?
Recognize…
Recognize crazes and fads. Analyze for yourself if there’s any justification for a current trend. What’s fueling the stock market and Bitcoin frenzy? When I look at the situation, I see demand being fueled purely by work of mouth through the internet and social media. A whole category of stocks – meme stocks – has arisen from this phenomenon of interest in particular stocks field purely by buzz.
Reject…
Ignore the noise. Avoid social media and buzz-worthy sites for investment direction or advice. Avoid the hot takes and take the time to study and research potential investment alternatives truly.
React…
Once you recognize the herd moving in a direction, you judge imprudent or unwise, react in the opposite direction. Take a cue from your HNW contemporaries and institutional investors and pay attention to where they’re putting their money.
Resolved…
Be resolved in your convictions. The payoff from tangible assets is not immediate. Cash-flowing real estate and businesses need time to ramp up. Your patience will be rewarded. You just have to stick to your convictions and let your investments play out.
Following the herd has never ended well in the stock market, and now, with this whole new crypto market phenomenon, things won’t end well for those jumping on the crypto bandwagon.
The most successful investors have been the ones that have gone against the grain and have sought their own paths.
They do their own research, look at the facts and the numbers, and make up their own minds. It’s why they never follow the mobs and also why they survive downturns and thrive in any economic environment.
