Beat The Herd Mentality To Improve Investment Results

Beating the markets is beating the herd mentality.T he intelligent investor is a great book to start reading for amateur investors. The book is rich in quantitative data but readers may find it hard to swallow as the language is written with a terse archaic style. But what the book does not touch on is how to be an emotionally intelligent investor and beat the herd mentality. While numbers are easy to handle, one’s emotions can prove to be an inconquerable mountain like Everest. And for most of us, this may very well be the final obstacle to being an investor great.

Descendants Of The Herd

The millions of years of evolution have whipped us into a herd of sorts. The biases we hold, the tendencies and our inclinations cause us more harm than good when it comes to investing. Evolutionary biology gives us a glimpse into how our ancestors evolved and how we came to be as descendants. We are not very different to our ancestors even though we have advanced technologically as a race.

Does the picture above describe us? I think so.

A few real life examples perhaps.

Examples Of The Herd At Work

I was just attending an auction. And I saw the herd mentality at work. With people and participants wanting to get in on the action, the organisers worked the participants up into a frenzy, contributing ever greater amounts to a targeted fund raising goal. The more people joined in, the more people joined in. The effect of more people joining in led to more people joining in ! What the ! Was that the herd at work? The tendency to want to conform? Or was it a need for self importance? People want to be seen giving don’t they? Well, perhaps a little bit of both then.

In the markets it works out the same way. Analysts churn out reports , orchestrating action from market participants.  Markets participants then react to each other, resulting in a monkey see monkey do effect . Everyone goads everyone else into action. “Hey hey hey, did you hear of this penny stock. The analyst have just upgraded the company.” The result is this. There is no longer any originality when it  comes to investment thinking. Everyone leeches of another started by some guy who saw value and was willing to stick to his guns and be different. Slowly but surely, this works the market into a frenzy and by the time you know it, the frenzy has run its course. Those who bought on promises of the growth story lose, while hanging on to hope itself. And this process repeats again and again for ordinary investors.

Finance Professionals Guilty As Charged

Amongst the finance professionals, I too discern a noticeable pattern. As it is the norm, after work hours include social gatherings and networking sessions. At these sessions, financial professionals discuss the hottest stocks in any given week, month or year. An idiot, one would look like, if his calls were different. It makes the idiot stand out, awkwardly unsocial of him isn’t it? The tendency to want to conform is a strong one, especially when aided by societal pressures.

I remember a time during my university days as an undergraduate. I was not only an active investor then, I was also a member in an investment club. During one of those years, there was a virtual investment game or competition then. Back then, I thought that I liked the way breadtalk was doing and I believed in the growth story of the company. And I recall a friend saying “what the hell are you doing investing in Breadtalk? Why? Why? Why?” There was no way I could outtalk him. I didn’t bother to even convince him. I believe that this was in 2003. Look at what has happened to Breadtalk since. It has moved up quite a bit, though not at the rate I was expecting.

On hindsight, of course I proved to be right. But it is incredibly hard to actually get someone convinced over the ideas that I had. They were so off to the normal person even within the finance sector. I also spent time going to investors gatherings which I felt was a complete waste of time. People debate to win, to inflate their egos the size of cows. The hot topics depended on what was in the news. Rarely did I find people who were genuinely interested in the betterment of one’s investment skills, people who could conduct a debate of ideas without their egos present. Afterall, some of these folks have had that ivy league education. They must have felt that they were right all the time!

So my question for many years and still up to this point is this. If one is not able to stand alone and be emotionally secure about his investments how is he ever going to beat the market? How is one going to do well as an investor? Tough chance I would say.

The Elevator Experiment

Just to push this further. Have you heard of the elevator experiment? The experiment on conformity.  A man walks into an elevator and faces one way while the others face another. Guess what happens next? Even though the man is correct is facing the door of the lift, when everyone faces off in another direction, the man, socially pressurised, eventually does the same as well. There were 3 variations to the experiment and the outcomes were all the same. I shall attach the video here.

Did you laugh your head off? I was laughing my head off for sure. And it was a good one. It sure perked my boring day up !

While this is a funny one, it is not quite the same when it comes to investing. Because when it comes to investing, you pay a very high price for a cheery consensus! And a high price comes with a high probability of failure especially when mean reversion takes place.

And we are talking about putting our life’s savings at work here. If we lose, we lose big. And when that happens, it becomes incredibly difficult to get back on one’s feet. I have been a witness to some of these events in my life. So the eventual question you may have is would it be possible to overcome this? Yes we can. We can. But, I will leave that to another article.

Read also : Ignorance Of The Masses : Think Education Is Expensive? Think Again!


I have been an investor for 15 years now and my journey has meandered from Warren Buffett to Ben Graham. My start, like many, really was the naive idea that Buffett's skills could be replicated in some fashion. I was proven wrong when some of the supposed stock picks that I chose had dismal performances. Then, I learnt that it is no point trying to be someone I am not. Gradually, through failure and some success in deep value investing, my approach towards stocks gradually shifted to an approach based around Graham's techniques. So, I give credit where credit is due and to Ben Graham, I and many other investors around the world, owe him a great deal. So, if you want to read up on biographies, read about Ben Graham. His seminal work, Security Analysis is a gem. My books are just rich interpretations of what he has taught.

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