If All Your Friends Jumped Off A Bridge: The Dangers Of Following The Herd
In the animal kingdom, moving in a herd has its advantages. It’s difficult to get lost when you stick with the crowd. All you have to do is follow whoever’s in front of you. There’s always safety in numbers. When there’s a large number of animals in a herd, predators may be too intimidated to attack and, if they do, you can at least hope they pick off your friend instead of you. It’s also just plain easier to be in a herd. You don’t have to make conscious choices about everything; you simply do what everyone else is doing. All in all, it’s a fairly easy life. Stick with the hive, and you’ll have all the honey you need.
On the other hand, being in a herd can be disastrous. The very same things that are advantages for some animals turn out to be disadvantages for others. You’ve probably heard of the species of rodent called “lemmings.” These animals have been seen jumping off cliffs into ravines en masse, puzzling onlookers with such behavior for centuries. Contrary to popular belief, the rodents are not intentionally committing suicide. As part of their migratory patterns, they often must cross bodies of water. However, many of them often go drown in the attempt. Following the herd works out for some, but not for others.
As far as there being “safety in numbers,” the opposite is also true. Predators often seek out herds, because they know that’s where the food is. The wolf knows that where there is one sheep, there are many. The wolf’s odds of getting a delicious meal are fairly high. Following the herd might mean you can forego the cognitive effort of making your own decisions, but it also means that you are stuck with the decisions of others–for better or for worse. In the end, the herd mentality tends to be great for the herd but not so great for its individual members.
Now, let’s translate this into the human world and, in particular, the world of investing. As an investor, the temptation to follow the herd is always before us. Especially when there are large fluctuations in the marketplace, we can be tempted to do what everyone else is doing. Furthermore, it’s appealing to us for the same reasons. It feels safer and it takes less effort. Why bother trying to come up with our own strategy when we can just follow everybody else’s?
The answer to this question is simple: because, sometimes, it can lead us to drown. Sometimes, it leaves us vulnerable to predation. In the stock market, investors are often driven by panic more than anything else. We lose our rationality when we follow the masses in such panic. We forget our values and our investing philosophy. As a result, we end up sacrificing everything we believe in under the false assumption that, if everybody’s doing it, it can’t be that bad.
The truth is that, if everybody’s doing it, it’s probably not that good. Have the courage to go your own way. If you need any help designing an investing strategy that works for you, rather than one that simply copies everyone else, feel free to reach out to us for a complimentary consultation. Whatever you do, don’t blindly follow your friends. You’ll end up getting slaughtered!