The herd mentality is crucial for the survival of many wild animals. Hunting, feeding and travelling together gives the majority of the animals in a pack anonymity and guarantees their safety. While the weakest members of the pack are unfortunate collateral damage, picked off by predators or abandoned, the chances of survival for most of the group members is increased by being part of the herd.
While we humans might believe that our individuality and uniqueness differentiates us from the animal kingdom, we frequently act in ways that are a hangover from our cave-dwelling hunter-gatherer days. The ephemeral crazes that sweep school playgrounds across the world – TikTok, fidget spinners, slime-making, loom bands – herd mentality. Fashionistas embracing the ‘vintage’ (aka secondhand!) vibe – herd mentality. Feral shoppers trampling over one another to save 20% on a TV they don’t really need on Black Friday – herd mentality.
It seems that, just like animals, we are hard-wired to follow the herd and, even though doing so is no longer a matter of life or death for humans, millions of years of evolution have not succeeded in eliminating the tendency to conform.
But when it comes to investing, fight this predisposition we must because going with the flow is more likely to lead to your financial extinction than turn you into a millionaire.
Amateur investors frequently make the mistake of seeking out and acting on expert tips regarding which stocks to purchase when, and at what point they shoud sell. The trouble is that once these tips are freely available to anyone, following the herd is more likely to lead to one of two worst-case scenarios: buying at the top of the market or selling at the bottom of the market.
Think back to the dotcom bubble of the 1990s. The internet triggered a 20th century gold rush with investors risking their life savings on companies tipped to be the next big thing but often with flawed business models and over-optimistic expansion plans. Remember eToys.com?
Founded in 1997, eToys.com was the first major online toy retailer launched in 1998. The company went public in May 1999. Shares issued at $20 rocketed to $76 in the first day of trading and hit a high of $84 in October of the same year. However, by February 2001 those same shares were trading at just 9 cents a share – ouch! The company went bankrupt shortly afterwards and eToys was consigned to the dotcom scrapheap, although the domain has changed hands several times since, ending up under the ownership of Toys ‘R’ Us, a company which also filed for bankruptcy in 2017. According to one analyst, Etoys failed because it did not have the financial capacity to weather a downturn in the retail market.
Compare that with another dotcom set up you might have heard of: Amazon. From its origins as an online bookstore, over the last quarter of a century Amazon has morphed into the world’s largest online retailer, posting first quarter revenue in 2020 of $75.5 billion. And it has done so by focusing its attention on the fundamentals.
And therein lies a clue to investment success. Favour a portfolio of stocks in companies that exhibit solid fundamentals, strong earnings power, and the potential for continued growth rather than basing your investment decisions on what others are doing, chasing fast returns on the latest hot properties or getting swept up in the panic of an impending recession and selling when every other Tom, Dick and Harry is doing so.
Successful investing requires a more measured approach. The basics of investing remain the same whatever is happening in the markets. Ignore the herd and:
- Invest in a well-researched and diversified porfolio
- Focus on consistent long term returns
- Limit exposure to risk
Granted, this strategy will not win any prizes for thrills and excitement but it will ensure that you’re not the weak link picked off in a metaphorical stampede and guarantee your financial survival now and in the future.
For help achieving these three investment basics, why not contact us to discuss your financial plan?
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