Following The Herd Isn’t A Smart Investment Strategy – Here’s 3 Reasons Why
by Jeff Sekinger, CEO of Nurp
According to Jeff, blindly following the herd is one of the most common investing mistakes he sees people make. It’s a scenario that plays out all too often – a hot new stock rockets up the charts, fueled by hype and excitement. Suddenly, everyone seems to be jumping on board, convinced it’s the next big thing. But for many investors caught up in the frenzy, the outcome is far from ideal. This is why I firmly believe that following the herd mentality is a recipe for disaster in the investment world.
Here are three key reasons why you should chart your own course:
1. Lack of Conviction Leads to Emotional Investing.
One of the biggest pitfalls of following the crowd is the lack of understanding about what you’re actually investing in. When you don’t truly grasp the underlying fundamentals of a company or asset class, it’s difficult to develop conviction – that unshakeable belief in its long-term value. This lack of conviction becomes a vulnerability when markets inevitably experience volatility. As prices dip, fear sets in, and investors who don’t understand the bigger picture are more likely to panic and sell at a loss. This classic “buy high, sell low” behavior is a surefire way to erode your investment returns.
Think of it this way: You’re at a bustling restaurant with an overwhelming menu. Everyone around you seems to be ordering the same dish, so you follow suit without really knowing what it tastes like. When the food arrives and it’s not to your taste, you’re more likely to push it away unfinished. Now, compare that to a scenario where you’ve researched the menu, understand the ingredients, and confidently order a dish you know you’ll enjoy. That’s the difference between investing based on fleeting trends and investing with conviction.
2. Data-Driven Decisions vs. Following the Emotional Rollercoaster.
The second reason to ditch the herd mentality is that it often leads to emotional decision-making. When everyone else is getting excited about a particular investment, it’s easy to get swept up in the euphoria. You might start seeing dollar signs instead of red flags, ignoring crucial data and analysis. However, successful investing requires a calm and collected approach, one that prioritizes objective data and research over fleeting emotions.
By dedicating time to research companies and sectors that pique your interest, you’ll gain a deeper understanding of their strengths, weaknesses, opportunities, and threats (SWOT analysis). You’ll analyze financial statements, assess competitive advantages, and gain an overall sense of the industry’s health. This data-driven approach equips you to make informed decisions based on fact, not emotions based on what the crowd is doing.
3. Be a Trendsetter, Not a Follower – Anticipate the Market.
Perhaps the most crucial reason to avoid following the herd is that it prevents you from anticipating the market. The reality is that the financial markets are a zero-sum game. For someone to win, someone else has to lose. This means that by the time the masses catch wind of a hot investment and jump in, the opportunity has likely already peaked.
Truly successful investors understand the importance of being ahead of the curve. This requires the ability to analyze current trends and anticipate where the market is headed in the future. Take the stock market as an example. The market often prices in future events well in advance. For instance, a potential recession might be priced in 9 to 12 months before it actually hits. Similarly, the bond market might start rallying months in advance, anticipating a pause or decrease in interest rates. By understanding these dynamics, you can position yourself strategically before the herd arrives, potentially reaping significant rewards.
As the saying goes: “The best time to plant a tree was 20 years ago. The second-best time is now.” This applies perfectly to investing. Don’t wait for everyone else to figure out a good opportunity before you take action. Do your research, develop your conviction, and make your move based on sound data and your own analysis. Embrace a proactive approach and avoid the herd mentality. This way, you’ll be well on your way to achieving your long-term investment goals.
Investing doesn’t have to be a complex or intimidating process. Prioritize research, build conviction, and learn to anticipate the market so you can become a confident and empowered investor, headed toward a brighter financial future.
Jeff Sekinger is a financial innovator and entrepreneur who has founded three influential firms: 0 Percent, Orca Capital, and Nurp LLC, revolutionizing financial education, asset management, and Forex trading. Today, based in Miami, FL, his work with these ventures is setting new industry standards and empowering entrepreneurs with strategies for financial independence and success.