The Perils of Herd Mentality In Investing


I have the tendency to look at listed company stocks as real-life human beings.

And one of the company stocks that I think looks like their real-life counterpart is the hot and famous stock. The stock that everyone is talking about and wants to buy.

Be it the old uncles at the Kopitiam, or the aunties doing their daily morning rounds the market.

And there are never-ending examples, be it if you are in Malaysian or Singapore.

I believe Malaysians are very familiar to companies like Aturmaju Resources Bhd, Sapura Resources Bhd, AirAsia Group Bhd.

While over the causeway, the recent spotlight was all on Eagle Hospitality Trust

  • Tip: You might want to check out our latest coverage on AirAsia Group Bhd’s latest 2019 Quarter Report here

Hot stocks and the cool kids share a lot of traits in common.

Everyone was to be associated with them. Everyone wants boasting rights. It’s in human nature. But when they lose their gleam and shine, things usually get into some unwanted complications.

Investing or making real friends is more than just finding the hot stocks that everyone is talking about, or going to lunch with the most famous kid on the block.

I’m sure all of us know the essences and traits of a person that makes a great friend.

A great friend is someone who would have your back, have your trust, never gonna give you up.

Well, the exact same ingredients go to finding a great company to invest!

You want your investments to be able to grow regardless of economic times, rewards your patience by compounding your investments and delivering great returns. Also to never disturb your sleep by giving you headaches!

You've got a Friend in Me/ Disney Inspired Toy Story image 0
What a fantastic stock portfolio right?

I think we need a paradigm shift. Most of us have that one or two best friends that we can count on. The same mindset should be applied when it comes to choosing a company to invest in. Instead of going on full blast herd mentality to be associated with the hottest stock that everyone is talking about, taking an uncalculated bet on the volatile gyrations in the stock prices, it would be best to choose a stable but surely profitable investment.

But then again, if stock speculations seem like a profitable venture for you, i.e. you have a PROVEN method that gives you a high probability to profit from the price fluctuations, by all means, continue what you think is of your best interest. The contents of this article are mainly to serve as a wake-up slap in the face for those who have been making losing bets on hot stocks under the herd mentality.

It is not impossible to profit from a hot stock’s volatile price. But, to be successful for that, you’ll need to be

  1. The “Innovators” – The first few to jump and start the bandwagon. Usually people with insider news.
  2. The “Early Adopters” – The first few retail traders with no access to insider news but spot a price opportunity. You’ll need to have an exit plan if there is a drastic change in place.
  3. Looking at the price screen all the time. Cause it is pure speculation and you know nothing whether the company is making money or not.

Of course, should you fulfil the above 3 criteria, you would have passed the risk assessment and analysis part with ease, which justifies your involvement in such relatively risky bets.

But for most of us, who have a 9-5 job, it is almost an impossible task to keep our eyes glued to the pricing screens. But yet most of us, “The Herd” still take risky bets on hot stocks without even monitoring them closely!

What to do the next time the idea of jumping onto a hot stock arises? Remind yourself, that one-off bets, no matter how lucrative, you can only earn a one-off 3 digit capital gains. While it might sound lucrative, putting it into perspective, most of us would not have the guts to pool in a 5 digit worth bet on a stock that could go either way. So the amount vested would be relatively small, maybe a few thousands. And to earn a one-off RM 1,000 – RM 3,000, we subject ourselves to mental torture.

Investing or trading is a zero-sum game. Coupled with the Pareto law, winners in this game would always be the contrarian. Herd mentality will and always result in a high probability of losses rather than wins.

Image result for pareto meme

The information available in this article/report/analysis is for sharing and education purposes only. This is neither a recommendation to purchase or sell any of the shares, securities or other instruments mentioned; nor can it be treated as professional advice to buy, sell or take a position in any shares, securities or other instruments. If you need specific investment advice, please consult the relevant professional investment advice and/or for study or research only.
No warranty is made with respect to the accuracy, adequacy, reliability, suitability, applicability, or completeness of the information contained. The author disclaims any reward or responsibility for any gains or losses arising from direct and indirect use & application of any contents of the article/report/written material

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