In portfolio management, following the crowd can lead to poor investment returns. I remember when I was a kid, my grandfather worked at a slaughter house. He would take us there and show us that if you got a few of the cattle to run towards the slaughter house, with the exception of a few, all would happily follow the herd to their demise.
Are you the type of investor to follow the crowd, or are you one of the few who thinks for themselves? Following the crowd is “group thinking”.
There is emotional comfort in doing what everyone else is doing. We feel good when others agree with us. We are comfortable when we follow the majority.
Unfortunately investors often don’t recognize when a trend is exhausted. Exhaustion is the point where everyone has acted and there are no more followers to participate in the action.
If everyone is bullish on a stock, industry, or the market: beware; that means there are few investors left to buy but many are invested with the ability to sell at the first sign of panic. If everyone is bearish, look for opportunity; there are few investors left to sell and the price may be a bargain.
Are you following the investment crowd, or thinking independently?
Related Reading: Investing Concepts to Manage a Portfolio