Imagine, if you will, that you’re walking down the street, minding your own business.
All of a sudden, a crowd of people starts running towards you,fear in their eyes, obviously trying to get away from something.
And You’re walking TOWARDS whatever they’re fleeing.
What do you do? What do you feel in that moment? Do you stay on your original path, or do you join the crowd and run from something that you’re not even aware of, without question?
Would it surprise you to learn that studies show that over 95% of people would join the crowd and run?
Psychologists call this the Herd Effect. And if you hadn’t guessed by now, that’s how well over 95% of us invest in the markets.We look to the larger investing crowd for guidance. And due to the pervasive effects of Social Media, we’ve become dependent on what others think.
A small minority of social media influencers can get 95% of the rest to move in or out of an asset. We look to Yelp scores before we go to a restaurant. We shop for things like apartments and pens based on what others score their experiences with that product. We have been conditioned to implicitly trust these reviews. Think about how many decisions that you make during the day that are influenced by a 5-star product review?.
Many of our daily decisions have been socialized like this, for a lack of a better term. We feel safer in a crowd. We feel protected, we feel accepted and part of something larger than ourselves.
Well, this might be a great thing if you’re contributing to a foundation or helping with a charity, or cheering on your favorite team, but it’s going to lead to dismal performance if you’re interested in investing or trading. When you outsource the decision-making to others, you’ll find that you’re consistently buying at the highs when the social buzz is strong, and selling out at the lows when there’s no love for that asset.
And this will be apparent whether you’re investing in stocks, crypto, tulip bulbs, baseball cards, whatever it is. We now have entire generations that are making decisions like this in a socialized manner.
When I bring up these facts to others, many are defensive, in effect saying “you’re overstating things…there’s a big difference between trusting a five-star review for a pen vs. trusting a video on an investment.” Fair enough, there certainly is a difference between the two, but my point is that we are so conditioned to accepting mass reviews that we’ve learned to rely on others and just go with the crowd.
Take a moment and look around you. Fortune favors the independent thinkers, the ones that are willing to go against the crowd, they see the true path and find that unique opportunity when no one else is looking for it. Steve Jobs…Elon Musk….CZ of Binance. Do you think these guys waited for everything to feel just right before they invested their time and money? Hell no.
In fact, when it comes to opportunity, the one rule that I’ve found that rings true again and again when it comes to investing and trading is to find the setups that don’t feel good, the ones that no one else is interested in. Almost invariably, they will be the opportunities that work out the best, and they will be going against the crowd.
So the next time you see a crowd running away from something, walk towards it. And learn what it feels like to be the 5 percent. .
Do you have any stories to tell where you went against the grain? Let me know in the comments below!
Doc Severson