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Followers make terrible investors! - Views on News from Equitymaster
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  • Dec 13, 2010

    Followers make terrible investors!

    "Are you crazy? The whole world is doing that. So many people can't be wrong."

    Most of us have grown up dealing with these kinds of admonitions from people around us. The two strongest ideas that have been repeatedly and vigorously hammered into our minds are:

    1. Listen to authority
    2. Do what others do

    In these two ideas lie the answers to a lot of our thought and behaviour patterns. And guess which the best place to spot these patterns is? Of course, we're talking about the stock markets.

    Let us elaborate how religiously most of us follow these two commandments. Take the first one about conforming to authority. Every lay investor almost compulsively likes to have a stock market "guru". The guru could be some so-called "market wizard" sharing his wisdom on news channels. Or it could be an old crony who seems to have some special contacts. It could be almost anyone. There is such an innate need in us to follow someone "higher above us". Why? Are we not out of school or college yet? The answer is an unpleasant yes. We're physically out of school but our need for school teachers hasn't gone. We're programmed to believe that there always exists someone "other than us" who knows better. The habit to be constantly guided, corrected, scolded, straightened has been deeply ingrained into our psyche.

    And we're often too happy to ape others. It feels safe to be on the same boat as everyone else. Even if it sinks, you could blame either the boat or the tide. Otherwise why would we be tempted to respond to any random "hot tip"? And that too, one that comes from a friend's cousin's acquaintance's sub-broker? We perpetually live the greater fool theory and often end up wearing the crown.

    The influences of our parents and school teachers are very evident in the way we invest. But our tendency to join herds goes much beyond our learning at homes and schools. If you look around in nature, every creature survives and thrives in groups. Over centuries, societies and civilizations have evolved through a collective process. Man was most successful in activities like hunting and farming when he did them in groups. So we know where our herd mentality comes from.

    These same rules when applied to investing can be very endangering to our survival. Why? There are quite a few reasons. In hunting and farming, men rival against other creatures or forces of nature. However, in the game of investing, every man's rival is every other man. There is no collective victory. Someone has to become a fool for you to become successful. That is why being a contrarian works here. Being an argumentative and disobedient back-bencher works too.

    Our advice, though simple, is difficult to follow. Listen to what authority is saying. But be daring enough to challenge and reject what they claim. And as far as friends and relatives are concerned, ignore them at best.



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