Marzee Kerawala is a Certified Financial Planner with expertise in Income Tax and Investment products. Managing assets worth over Rs. 4 Billion, his firm ‘NiveshIndia’, designs Tailored Investment Strategy through Customised Financial Planning for individuals and NRIs, and also handles Treasury Management for corporates and SMEs. You can contact him at +91 9987567667 or Email: marzeek@niveshindia.co.in [Website is www.niveshindia.in]
The idea of making Big Money and Quick Money has always attracted people to stock markets. However, what most of them don’t know, is making money in stock markets is simple, yet not easy. Apart from having sound processes and a financial plan, it requires loads of patience and discipline. Today, let’s explore ‘herd mentality’, which should be avoided at all times while investing. It is a phenomenon where investors follow what other investors are buying, rather than following their own financial plan or Asset Allocation. It is often driven by the fear of missing out.
It is normal to get tempted by the prospect of becoming rich quickly. When a particular stock or asset is moving one side up, it gets frustrating for the onlooker, who is sitting on fence, to see people make money around him. The typical buyer’s decision is usually influenced by the actions of his friends, neighbours or relatives. Thus, if everybody around is investing in a particular stock, (I see it happening a lot these days, in a particular company stock) the tendency for potential investors is to do the same.
But this strategy is bound to backfire in the long run – it’s like going out for dinner with friends in a restaurant where the IPL match is being telecast live… even though you’re not interested in the IPL, you find yourself cheering for a team and the next day you order its merchandise on amazon! That’s typical herd mentality. When it comes to investing, herd behaviour can wipe off your capital. Proper research should always be undertaken before investing in stocks. But that is rarely done. Investors generally go by the name of a company. Most of the people choose this option because of two reasons – 1) Strong peer pressure: most people like to be accepted by a group, following them or doing what they do is often the result of a reaction to peer pressure; and 2) Irrational belief that a large no of people cannot be wrong at the same time.
Unless you have control over your biases and have sound domain in the field, it is very difficult to oppose the masses. Most financial crisis in stock markets are attributed to the human tendency called ‘Herd Mentality’. History shows that most times investors buy a stock or invest in equities because everyone around is buying it. There is a strong temptation to act based on emotions rather than sound financial plan. We have many examples in history starting right from 1992 – the Harshad Mehta Scam – the Big Bull on Dalal Street turned wild, and along with it, blew away thousands of crores of investor’s wealth and maybe a few investors too!
Another classic example of herd behaviour occurred in 1999-2000 – Dotcom Bubble. Investor’s the world over invested in IT stocks. During those day, many non-IT sector companies changed their names and had prefixed or affixed info, tech, dotcom, global etc to their names, just to sound similar to an IT company, and investors (including myself) had merrily lapped up stocks of many loss-making firms! A similar trend was again seen in the year 2006-2007. Investors had invested pots of money in Infrastructure Mutual Funds and NFO’s. Five years after the mania, investors were still counting their losses!
2017 saw rise of Bitcoin mania, digital cryptocurrency, the price of which soared 25 times in a matter of one year. I personally know few friends, who, leave aside understanding the financial product, were not even able to spell it properly, but wanted my help and guidance to trade in this virtual currency. Bitcoin was first introduced as a payment system for day-to-day things like groceries, medicines etc. However, most people speculating in bitcoin did not buy the cryptocurrency to use it in such transactions, but to speculate and profit from continuous rise in past.
Investors that follow this herd mentality are always left disappointed to see huge negative returns, most times even perpetual capital wipe off at the end of each of these cycles. Always remember your PLAN is more important than your PORTFOLIO or PRODUCT. In the end, what such crises teach you is having the right priorities. In case your priorities for investments are not right yet, use this time to learn and correct them!
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