This topic came to me today as I had a real encounter with it!
I was driving in my car on the way back home from doing some errands in a town about an hours drive from where I live. A quater of the way back, I have to slam my brakes because there is a whole line of cars standing still on the fast lane! I figured okay it must be an accident or roadworks or something, and after standing in this line for about 5 minutes, and having moved a small 5 metres with a few kms to go, I did not have the patience for it!
What amazed me was that the slow lane was totally free, and nobody was driving in it?!…
I took a chance and moved onto the slow lane and drove past all these people in their cars at a nice speed of 60km/h, all the way to my turnoff and cut into the fast lane again. Yeah sure, I cut in front of somebody and its skipping the queue, but there is no way I’m going to stand in that line for 2 hours to get to my turnoff when I can do it in 2 minutes! A few other people followed my example…but the rest all stood in that line like sheep.
In the investing world it is especially so, but with all sorts of things, there is an element of herd mentality. People do things just because “all the others” seem to be doing it that way. They wear clothes because other people wear them, they invest in stocks or property because that’s what everybody is doing. Most of the time, this is going to bring a minimal return, simply because of the fact that there is so much competition. If you are one of the leaders of the herd, yes then it’s profitable, if you join at the end, your money is first to go.
Think of a herd of buffalo in the Serengetti in Africa. They form a herd because in general it will increase their safety against predators, they feel safer. In reality, the predator will still attack the herd and seek out the weak or sick, so irrespective if you are part of a herd, there is still a very real chance of danger. And what if you are a lemming? Do you know what a lemming is? It’s an animal, that travels in a herd, that at a certain stage in their lives, will all run in a certain direction. As a lone lemming, you may see the herd and think “oooh, a herd, lets join it and follow it”. So you run and run and run…until all of a sudden you run off a cliff and plummet to your death, because that is what lemmings do, they commit suicide! So before you go off and follow a herd, and do something because everyone seems to be doing it, step back for a second and use your brain. It is very possible that out of 1000 people, 999 are wrong and you are the only right one.
BUT…THIS CAN WORK TO YOUR ADVANTAGE!
The most rewarding way to profit from herd mentality, is to anticipate major trends.
Of course people and companies are doing this all the time.
It’s not just with investing, where if you got into the stock early you will make a killing when joe average,the bus boy and everyone in your town start to buy the stock because it is such a good stock that will go on forever. (That’s the point when YOU, the smart one, needs to get out because the stock is about to tank)
A very recent example of this kind of behavious was with the global stockmarket, where in Japan, housewives of normal families were making more in a month trading stocks than they did in an entire years worth of work. Needless to say, stockmarkets are down 30-70% globally from that point!
Even with fashion, or songs, you could be wearing a style that is going to become the next fad, or have a song and show it to all your friends, that in 2 months will be playing in every single club in the country.
Anticipate a trend, or get in early before Joe Average does, and it will reward you greatly if you are right.Don’t follow the crowd:)
Ooh…as an interesting bit of information, a friend of mine told me something pretty unbelievable. He was at a farmers food market one day, and there was a competition to guess the weight of a pig. The winner could win a food hamper. There were about 50 people or more that guessed the weight and wrote their estimates down on a piece of paper. Guess what…not one of them was right, some were way over and others way under, but the collective average estimate of the crowd guessed the weight of the pig to within 500 grams!