The Herd Mentality is very strong in everything we do as human beings each day.
New fashion trends, technology, social norms all are influenced by the general population. Ideas and trends start small, with only a few people jumping on board. Then acceptance becomes more widespread and the new trend becomes the new norm. It's this Herd Mentality that prevents some people from joining the trend too early.
Herd Mentality Keeps You Out Of Market Bottoms
Think about where you would be now if you had joined the Internet or computer boom earlier? Or the mobile phone and Apple technology sooner? These were all amazing trends but only a few people joined the movement early? Why didn't they jump on board when the ideas first came out?
The same thing can be said about the stock market. More often than not, it's the investors and traders who go against the sentiment early that make the most money. How about the cover of Barron's on March 9th just before the bottom...
The Herd Mentality told them that it wasn't socially acceptable at the time to buy stocks again. It was new and "weird" and people were afraid to risk what money they had left. As a result they missed the bottom floor of these exploding markets.
It Also Keeps You In Before A Top Forms
Just as the Herd Mentality will prevent you from buying at the bottom, the Herd Mentality will also prevent you from getting out before the market top. We saw this just recently during the top in 2007-08. We all knew that the Sub-Prime mess was spreading but we didn't accept the truth until it was too late. And we could be in the same boat once again.
Here is the latest Barron's Cover showing the Bear market killing over...prophecy for the next top?
Emotions, not logic, usually rule the average investors' decision making. They are heavily reliant on social norms and trends. If the hot sector is alternative energy purely because so many people are investing there, then investors will follow smiling since there is perceived safety in numbers.
Investor psychologists and financial behavioral scholars have confirmed this during multiple case studies. Better investment choices require you to understand and embrace your emotions and determine how to avoid becoming your own worst enemy. In other words, the best investors stay out of their own way.
Investors Show Repeatable Habits
Repeatable habits and investor sentiment why technical analysis is so consistent and profitable. It identifies repeatable happens and patterns visually with charts, patterns and indicators. It is important for you to learn and understand the mental cues that are present in the market and how to prevent them from clouding your investment decision making.
Failure to learn and educate yourself on the Herd Mentality of investing can be disastrous to your portfolio. This is why we continue to preach and support trading plans and goals that help you remove your emotions when trading. Let the technicals and price action be your guide and you will find enormous success.