Investing Experts and the Herd Mentality

Buy low, sell high. 

Any idiot off the street could repeat this phrase to you as if they had the secret recipe for investing success. Honestly, it’s good advice. One of my favorite investing quotes, and one I try to base my investing strategy around comes from the great Warren Buffet. He famously said “Be greedy when others are fearful, and fearful when others are greedy.”

On the surface it seems like Buffett is saying the same thing a different way. But what I love about his quote is that it’s actually much deeper than simply buying low and selling high. His quote also illustrates why “buy low, sell high” is much easier said than done.

In the investing world, almost like no place else there is an amazing herd mentality. When things are going good, such as over the past month, all the talking heads will tell you how great of a time it is to buy! In 2009 at the height of the recession it was all doom and gloom. Analysts and pundits were more likely to tell you that the S&P had a better chance of hitting 0 than it did 1500.

“So what?” You might be asking. “The economy was terrible in 2009 and things are really looking good today, its common sense!”

Let’s take a look at what that advice looks like in picture form:


Following the herd mentality is one of the most common reasons individual investors fail. They jump in the market full throttle when everything is sunshine and rainbows like this past month, and they sell off or sit on the sidelines petrified with fear when true opportunity is staring them in the face.

Just last week Reuters wrote how “Investors pour a record $55 billion into US stock funds in January.” If investors were really trying to “buy low and sell high” would they really be going all-in on stocks when they’re at five-year highs? Doesn’t sound like good timing to me…

My point in all this is not to say that stocks are a bad investment right now, the market could well keep rising for another 2 years from this point. The point I want to drive home is that it’s of the utmost importance to block out all the noise and opinion where your investments are concerned.

investment-ratingsPundits and “experts” have a long history of being wrong. 21 of 35 ESPN “experts” picked the 49ers to win the Super Bowl. A certain political “expert” predicted a landslide win for Mitt Romney in the past election, and how can we forget all those ratings agencies that held    AAA credit ratings on Lehman Brothers and AIG just weeks before their collapse.

Visit any online brokerage site to research an investment and you’ll find something similar to the picture at the left. Ratings and opinions from multiple sources which in theory are designed to help you make better investment decisions.

From my experience it’s extremely rare to find anything rated below a “hold”. The few times I’ve seen sell ratings on stocks is when the stock price had already suffered a dramatic drop. The ratings to the left are actually from MasterCard (NYSE:MA), which is currently trading just below its all-time highs.

If you had followed Warren Buffett’s advice you would have bucked the trend and put your money to work when things were looking bleak. If you relied on the media and analysts to tell you when to get back into the market, chances are you missed out on some great returns over the past couple of years. In other words, you were the “others”.

The past recession was one of the worst ever. They said the world was ending. Yet here we are, standing safely on the other side. Know that no matter what, there will be more recessions, panics and bubbles in the future. How we react to them is entirely up to us.

When the next one comes along will you buy into the doom and gloom, selling on the way down. Only to buy back in once the recovery is in full swing? Or will you keep your long-term focus, and realize that short-term turbulence creates the opportunity for great long-term gains?

Enjoy the current bull market, but remember to stick to your asset allocation and stay focused on long-term goals. You shouldn’t stick all your cash into the market now any more than you should have taken it all out in 2009.

Are you able to stray from the herd and invest when times are tough?
Do you find yourself being swayed by analysts ratings when looking to invest?
What are some of your favorite investing quotes or mantras?

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21 Responses to Investing Experts and the Herd Mentality

  1. Great stuff, sir! I’ve always been able to coach people away from the herd mentality and keep them plugging along in the markets as they should be. Speaking about this topic though, my worst nightmare came true as I started helping my mom pick her 401k allocations 2 WEEKS before the market tanked in 2008. I made her stay the course despite losing 45% in her account in a matter of months. She kept contributing and didn’t change anything and now she’s way ahead of the game.

    It’s really difficult for people once fear sets in, but you really have to be smart and not make emotion-based decisions.

    • My mom might have killed me in that same spot! Good thing your mom trusted you enough to ride out the storm, I know a lot of people didn’t and are still behind even after the recovery.

  2. In general, I think we’re pretty good at straying from the herd. We bought RE in the depths of the crash, and we’re hoping to sell at least one of the properties when the lemmings get stupid again. (It’s bound to happen eventually with salt water access properties in a good area.)

    But I wouldn’t blame the whole January dump into stock on people being stupid. Some of that is auto-pilot investing. Take Mr. PoP and I. We had bigger than usual paychecks in January reflecting end of year bonuses/commissions. But the same % came out of our checks and went into our 401Ks… There’s a LOT of people like that.

    • I agree, I’m not saying that all the buying that’s been going on is dumb money. I’ve been buying a bit myself, but making the big swings from cash into stocks now that all the news is good are the ones missing the boat.

  3. “Enjoy the current bull market, but remember to stick to your asset allocation and stay focused on long-term goals.” I could not agree more! All too often retail investors follow this herd mentality and it ends up biting them in the butt a good majority of the time. You need to do what’s right for you and your plans/needs. I love Buffett’s quote, by the way, when I see that people are jumping that’s the very time to get in because you’re often likely to get a good price.

    • It was almost easier to invest a few years ago than it is today. When the market was in the tank you could find a stock at a good price while blindfolded. Takes a bit more work today!

  4. I didn’t have the opportunity to invest any fresh capital back in the worst days of the market because I was out of work. Not the best time to invest money when I need to eat. Although, I didn’t make any changes to the little bit of money invested in the 401k/Rollover IRA. We’ll see what happens happens come the next big drop in the market, but I have a feeling there won’t be much if any selling on my end. In late 2011 when there was another quick drop I was adding shares. It should be ingrained come the next recession, that this too shall pass.

    • I was still at the very start of my career when the market crashed, so I didn’t have as much money to invest as I wished I had. But I still was able to invest what I could and got some deals near the bottom.

      No matter how bad a recession seems, they always end. If a time comes where it doesn’t, I assume we’ll have much bigger problems than losing our money in the stock market anyway!

  5. I just had a conversation with a friend of mine the other day who was explaining that people lost everything in the stock market in 2008. To which I replied, only if they sold everything and sat on their cash. Had they stayed invested, the market would have gone back up. The loss was only a paper loss until they cashed out.

    Having shifted to a dividend growth investing strategy, I think I’m a bit more resilient to herd mentality. So long as my investments are doing what I bought them to do (consistently pay out and raise their dividends), I’ll hold onto them. Assuming the rest of the fundamentals remain sound.

    • Exactly, you haven’t really lost anything until you actually sell. I actually sat next to a woman at my old job who called up her broker and sold everything on one of those days the market dropped like 500pts back in ’08. I wanted to lunge across the aisle and rip the phone out of her hands…but I guess I was worried about losing the job they laid me off from a few months later!

  6. You said, “…it’s of the utmost importance to block out all the noise and opinion where your investments are concerned.” I completely agree on this one. I used to get so worked up about investing when I listened to CNBC all day, and I know I made some wrong trades because of it. I know the program has its place for reporting financial news, but I’ve had less stress about my money since turning that off.

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  8. Good writeup, I cover the “Buy high, Sell Low” aspect of emotional investing in this post; Jose

  9. Stocks in January reached some significantly high levels. Things are reaching a peak if we look at historical trends. It’s no guarantee of things dropping, but the gravy train doesn’t run forever!

    Best to not get intoxicated on success, as bull markets inevitably end. Also, when things look bleak, don’t they rebound? Also best not to overreact to bad news.

  10. The problem with “buy low, sell high” is that you can’t possibly know it at the time. January was a 5 year high. Unless February and onward starts dipping again, January wasn’t a high, simply higher. 10 years from now, we could be looking back and thinking, man, I wish I had invested in January 2013 when stocks were still low.

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  12. Integrator says:

    I love the “buying $1 for $0.5” that Warren Buffet used to use. I am sitting still for now and not investing anything new in the markets. I don’t expect the DOW to increase more than 10% for the year, so expect to get a mid year pullback once people’s attention turn back to Europe. There may be some buying opportunities then. My strategy is also to invest in dividend paying stocks, so I’m not too affected by markets and stock prices going up. I prefer them to be lower to get more yield for my investing dollar!

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  14. Brenda says:

    “Buy When There’s Blood In The Streets”
    I forget who said this but I really like it. It’s kept my head straight and saved my butt several times!

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