There are many “do’s” and “don’ts” in investment. The don’ts of course far outnumber the do’s but that should be the subject of a future post in this blog.
But number one in the list of don’ts is herd mentality or simply the tendency of humans to follow the herd without much thought.
As far as I am concerned, the fates or destinies of herds of whatever kind have long been settled, even if we discount investment from the equation.
One does not look far in nature to see the adverse, oftentimes horrible, fate of herds. Whether we talk about sheeps or cattle, we know where herds eventually lead to.
There’s a whole range of possibilities, but not one looks attractive. Sheeps eventually end up in shearing machines to emerge bald, their precious thick wool serving as fodder to the textile industry.
Cattles of course end up being milked daily (the metaphors on humans look irresistibly compelling) or worse, being brought straight to the slaughterhouse.
In the case of rodent-like creatures called lemmings, their fate looks just too horrible and unexplainable, we probably need super-psychologists to study the causes of their bizarre behavior.
Lemmings are known to multiply rapidly and migrate in huge numbers. And in desperate acts of frenzy which baffle psychologists to this day, they throw themselves right into the cliffs or plunge themselves right into the sea.
The rats, the lemmings rodent cousins, are probably better.
They are known to be among the first to abandon sinking ships. That is probably where our politicians first got the idea of leaving a party which performed poorly in the last elections, but that’s another story.
In investment, the adverse consequences of herd mentality are a matter of legend.
Somebody makes a killing in this or that business and everybody jumps into the business without much thought and the resulting competition demolishes whatever opportunity for profit there is.
There’s very hot tip that this or that stock will go through the roof in price and everybody jumps in to buy the stock.
Well, in 99.99% of the time, the hot tip turns out to be a dud. At best, the price of your stock remains lethargic. But more likely, you take a “haircut” in your investment. Or at worst, you lose your shirt.
There’s a time deposit scheme in bank X that doubles your money in two years, and everybody who has some money in the bank jumps in, even transferring their deposit from other banks.
A few months later, the bank closes, leaving thousands of depositors in the lurch and leaving the government deposit insurance company to thresh out and deal with angry depositors, some on the verge of being homicidal.
There’s a scheme that lets you earn millions by just putting in a few hundred pesos and recruiting or soliciting at least three other guys to join your network and parting with the same amount.
The other guys will do exactly as you did and solicit other guys and pretty soon you will all be millionaires. That’s how the hype goes.
Not anyone among you, of course, eventually earns the promised “get-rich quick” millions. Only the initiator of the Ponzi pyramid scheme and his cohorts walk away with millions bilked from every Tom, Dick and Harry gullible enough to join the fray.
Well, read the much earlier post “The Curse of the Pyramids” and see how herds and curses merge or join together like husband and wife.
Or read the very popular article “The Tale of the Oilman and How Herds Trash Reason” and see how herds become synonymous with “madness”.
See how herds become an irresistible force that can even beat a genius like Newton.
Enjoy the posts and be wise.