Staying an Individual in a Herd Mentality World
Staying an Individual in a Herd Mentality World by A. Haywood
As a thought experiment, let’s imagine the stock market as an entity that went through its normal cycles independent of humans. If you suddenly were the only one able to invest, playing the stock market would not be that much of a challenge: in a bear market, buy stocks as the prices drop and do the reverse in a bull market when prices are on the rise. Now we add into the equation the millions of traders across the world and suddenly the market is unpredictable.
Millions of people acting in isolation could probably make consistently sound decisions, but lumped together as they are, people find themselves being pressured one way or another in what psychologists call herd mentality. Or, to put it quite crudely, a group is only as intelligent as its stupidest member.
Financial guru Warren Buffet knows how to make millions on stock markets like the FTSE and NYSE. Over the years he’s been open with advice and advocates contrarianism, specifically, doing the opposite of what others do. Buy when people are selling and vice versa.
One of the advantages of such a strategy is that, while it can still be helpful to do so, it’s not necessary to stay on top of announcements from the ECB or BoE. Playing the markets as a free-wheeling contrarian means doing just that: playing the markets. Others keep eyes and ears pegged to inflation and interest rates, trading in an indirect way on politics—and quite crucially politicians—while the contrarian investor look at the numbers themselves. There’s validity to this strategy as contrarian investors stand to make money in commodities as crude oil has recently been decoupling from heavy industry.
Buffet has also preached the virtue of confidence in investing, stating that one should be comfortable enough to forgo checking one’s stocks for a decade. While undoubtedly hyperbolic, the lesson here can be interpreted on two levels. Firstly, you should invest in companies, currencies, or commodities that you think will go from strength to strength, regardless of however many dips and blips are encountered en route. Taking a long position on Google’s IPO would have paid off à la Buffet’s advice as shares went from $85 to just under $1000 at the time of going to press.
More crucially perhaps is the second aspect of Buffet’s advice. A nonpareil individual investor himself, as opposed to a serf to herd mentality, he implies that acting on the certainty of one’s predictions pays off. As social animals living in professional and personal societies across the world, it can be a formidable challenge to act in a different way than everyone else, especially when the ranks of “everyone else” are filled by our closest friends, beloved family members, and esteemed colleagues.
Nevertheless, the virtues of individuality in a sector so dominated by en masse behavior are self-evident. Though it may go against one’s instincts, ignoring the forex pips and sticking to one’s investment guns is often the best way to make a living (or retirement) through investing.