Stop what you’re doing for a minute and think about how you make decisions in today’s world.
When you went out for dinner last weekend, did you open your Yelp app on your smartphone to decide what restaurant to eat at? And if so, did you look at the number of stars on the customer reviews to make that choice?
When you went on your last vacation, did you use Trip Advisor to select your hotel or attraction to visit, once again based on the rating?
And the last time you were on Amazon.com, did you shop for that kitchen knife or power tool based on the number of stars that it received? Or if something only received 3 stars with 2 reviews, did you avoid buying it? “Hmmm, only 3 stars, looks sketchy, better go with the five-star rated product!”
If you’re like 99.9% of the people reading this, the answer was “yes” to all of the above questions. Social media and the sharing of review information has allowed us to rely on others’ experiences; it can reduce our decision-making risk and streamline the confusing process of making the choices that we make every day.
Think about it; we have “socialized” the process of making these daily decisions.
This is nothing new, we’ve relied on magazines like Consumer Reports for decades to give us ratings on high-ticket items, however it’s nothing at all like today’s instantaneous, in-your-face reviews and comments on any product or service from the world over.
And for the vast majority of people, there’s nothing wrong with this process. On a recent trip around Britain I relied heavily on former AirBNB guests to honestly rate a property before we’d stay there. For the most part, the former tenants got it right and it saved us a huge hassle.
Sure, the possibility exists for someone/something to “taint” the system with bot reviews and paid shills, but companies like Amazon are trying to keep the process as clean as they can. And for the most part it works well for consumers. So I would say that the majority are “OK” with the fact that we’ve socialized the consumer purchasing process for most goods/services requiring an investment.
With that point made, now I want to turn to the process of Investing.
The majority of retail traders come into the process of “investing” without any significant training or experience. So what’s the first thing that they do?
Use the same consumer process for “socializing” their trading decisions.
And this is a fatal mistake for most retail accounts. What no one will tell you when you get into investing is that “going with the crowd” is the number one mistake that many make. “Going with the crowd” is what causes FOMO (fear of missing out) buying as the price tops out on a rally, as well as what causes people to “puke out” their holdings on the final leg of a sell-off, right before it rallies off the lows.
In fact, the one comment that I hear over and over again from new investors is, “the market seems to move in the exact opposite direction to whatever I do!” This is extremely common, and while the cause for this is a little beyond the scope of today’s article, it’s fair to say that this happens to most people over and over again until they figure out how to break the cycle.
But you cannot break this cycle as long as you are “socializing” your investing decisions. You must strive to be independent to have any edge over the crowd.
Think about it; if you are getting your investing ideas off of a Twitter feed that is followed by thousands, or taking the same trades as a popular YouTube influencer, then you will be making the same socially-generated entries and exits as everyone else. In that case, you have to hope that the underlying move is strong enough to carry the weight of all of these new investors.
Price usually moves in a strong and dramatic way when the “majority” are wrong and they’re bailing out en masse, not when they’re collectively right. Someone has to be “wrong” for the price to move violently one way or the other, and chances are it’s going to be the collective social herd. Better to be betting against them than joining them.
So how can you learn to be an independent investor? Especially when you might only have a small amount of experience?
The first step is FOCUS. Dedicate yourself to learning only one or two assets and follow those exclusively. And when I say “follow,” I don’t mean “follow public opinion.” In fact, do everything that you can NOT to receive public opinion on these assets. Become an expert in how they move, and don’t try to be a “jack of all trades” by following too many coins. You’ll end up being a Master of None.
Once you start to follow a very small subset of assets, the second step is to build a plan. Understand exactly where and when you will buy and sell that asset. Perhaps you’re a DCA investor buying small pieces every so often…ok, WHEN? WHERE? Define it, and write it down. Maybe you’re a technical trader? OK, write down your trading plan. Define your exits PRIOR to entering a position.
It can be that simple.
But your mind will fight you every step of the way. Being independent is scary; getting affirmation and seeking social input is like a drug that we’re addicted to.
But if you seek success in the financial markets, whether it’s crypto, equities, futures, what have you….you must first stop Socializing your decisions, and begin to think independently.