Capitalist
18-06-2004, 01:17 PM
A good article from O'Herald about herd mentality...(emphasis mine)
The ups and downs of being a lemming
18.06.2004
COMMENT
Fear of losing money isn't the only emotion that bedevils people when they invest for growth.
Another big bugaboo is the impulse to seek the comfort of the herd. While that may be a subtler problem, it is no less troublesome.
No, no, you may say, investors don't huddle together for protection. They compete fiercely with one another.
Too often that image doesn't square with reality. Group-think, or crowd psychology, runs rampant in investing decisions of all kinds.
What prompts these thoughts is a comment on "the retirement imperative" in money manager Thomas Au's new book, A Modern Approach to Graham & Dodd Investing.
"Whether they recognise it or not, many people are concerned that their investments will give them a similar lifestyle and retirement as their friends or some other reference group," says 46-year-old Au. "Thus, if a person's family and friends are all buying technology or internet stocks, it is a rare individual who will not be similarly invested ...
"A similar rule applies to a group of people who all have most of their assets invested in their company's stock.
"If such investments prosper, terrific! If not, 'misery loves company'."
For professional investors, straying too far from the pack is not something to be lightly done - not when investment committees, pension consultants and other evaluators are so prone to judging the results a manager achieves against peer-group norms or market indexes.
Sure, the system says, beat the index if you can. Just don't stray too far from it, either above or below.
"There is a tendency to invest with the pack because it is safer," wrote Bob Litterman, director of quantitative resources at Goldman, Sachs in a commentary aimed at investing institutions.
Understandable as this urge may be, it glorifies mediocrity.
And when individuals, wishing to learn from the pros, get entangled in relative-performance thinking, the results can be downright ridiculous.
"What are your objectives?" I once asked an investor who had asked me to recommend a few good mutual funds.
"I don't know," was the reply. "To beat the S&P 500, I guess."
For individuals who need only answer to themselves, that makes no sense. As long as you aren't being paid on the basis of relative performance, index beating is of very little benefit.
The main motives for such thinking are emotional, not financial - to appear smart or to avoid looking foolish.
Au points out that one of the most famous of all crowd followers in nature, the lemming, may pursue the herd instinct to the death.
Lemmings are rodents legendary for "periodic mass migrations that sometimes end in drowning", in the words of the American Heritage Dictionary.
This self-destructive behaviour has a payoff, says Au.
"Every lemming who dives into the ocean gets to retire in the same style as every other lemming who does the same."
The lemming that doesn't go along with the crowd makes a choice that isn't so easy - staying around to face the cold tundra alone.
Likewise in the market, where avoiding the madness of the masses may take more courage than is generally acknowledged.
So how does one apply all this to fund investing?
Instead of buying what others are buying, Au suggests, "choose a style that is compatible with your temperament as well as your investment objectives".
That takes some knowledge and skill. To help acquire that skill, Au offers a worthy suggestion.
"All but the busiest investors should manage at least a portion of their own portfolio, to get a taste of the business of investment, thereby learning what a mutual fund manager or an adviser can or cannot do."
Ah yes, knowledge born of experience. It might be useful in figuring out how not to get trampled running with the herd.
- BLOOMBERG
The ups and downs of being a lemming
18.06.2004
COMMENT
Fear of losing money isn't the only emotion that bedevils people when they invest for growth.
Another big bugaboo is the impulse to seek the comfort of the herd. While that may be a subtler problem, it is no less troublesome.
No, no, you may say, investors don't huddle together for protection. They compete fiercely with one another.
Too often that image doesn't square with reality. Group-think, or crowd psychology, runs rampant in investing decisions of all kinds.
What prompts these thoughts is a comment on "the retirement imperative" in money manager Thomas Au's new book, A Modern Approach to Graham & Dodd Investing.
"Whether they recognise it or not, many people are concerned that their investments will give them a similar lifestyle and retirement as their friends or some other reference group," says 46-year-old Au. "Thus, if a person's family and friends are all buying technology or internet stocks, it is a rare individual who will not be similarly invested ...
"A similar rule applies to a group of people who all have most of their assets invested in their company's stock.
"If such investments prosper, terrific! If not, 'misery loves company'."
For professional investors, straying too far from the pack is not something to be lightly done - not when investment committees, pension consultants and other evaluators are so prone to judging the results a manager achieves against peer-group norms or market indexes.
Sure, the system says, beat the index if you can. Just don't stray too far from it, either above or below.
"There is a tendency to invest with the pack because it is safer," wrote Bob Litterman, director of quantitative resources at Goldman, Sachs in a commentary aimed at investing institutions.
Understandable as this urge may be, it glorifies mediocrity.
And when individuals, wishing to learn from the pros, get entangled in relative-performance thinking, the results can be downright ridiculous.
"What are your objectives?" I once asked an investor who had asked me to recommend a few good mutual funds.
"I don't know," was the reply. "To beat the S&P 500, I guess."
For individuals who need only answer to themselves, that makes no sense. As long as you aren't being paid on the basis of relative performance, index beating is of very little benefit.
The main motives for such thinking are emotional, not financial - to appear smart or to avoid looking foolish.
Au points out that one of the most famous of all crowd followers in nature, the lemming, may pursue the herd instinct to the death.
Lemmings are rodents legendary for "periodic mass migrations that sometimes end in drowning", in the words of the American Heritage Dictionary.
This self-destructive behaviour has a payoff, says Au.
"Every lemming who dives into the ocean gets to retire in the same style as every other lemming who does the same."
The lemming that doesn't go along with the crowd makes a choice that isn't so easy - staying around to face the cold tundra alone.
Likewise in the market, where avoiding the madness of the masses may take more courage than is generally acknowledged.
So how does one apply all this to fund investing?
Instead of buying what others are buying, Au suggests, "choose a style that is compatible with your temperament as well as your investment objectives".
That takes some knowledge and skill. To help acquire that skill, Au offers a worthy suggestion.
"All but the busiest investors should manage at least a portion of their own portfolio, to get a taste of the business of investment, thereby learning what a mutual fund manager or an adviser can or cannot do."
Ah yes, knowledge born of experience. It might be useful in figuring out how not to get trampled running with the herd.
- BLOOMBERG