Herds, Bubbles and Human Nature

Why is investing so hard?

Global Market Update - Buffalo Herd

Source: South Dakota Department of Tourism

Investors have to wrestle with many issues—economics, financial reporting, asset structure, valuation—but perhaps the most difficult factor they face is their own nature. People are naturally social creatures, something Aristotle noted 2500 years ago. We like to do what other people are doing. Going against the crowd can feel like standing up against a herd of charging buffalo.

But strategists have long seen the advantages of going against prevailing opinion. “Never follow the crowd,” Bernard Baruch says. Sir John Templeton put it this way: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” We need to buy when most people are pessimistic and sell when they are optimistic.

The past 15 years have seen this borne out twice: once during the internet boom and bust, and then again during the housing boom and bust. Now there seems to be a bubble in “bubble spotting”: looking for investments inflated by optimism and leverage, to avoid the fallout from when they pop.

Global Market Update - Bubble Bursting

Source: Twitter

But the very fact that people are looking for bubbles means bubbles are less likely to form. We may be social animals, but other investors are our competitors.

That’s why it’s so dangerous to be part of a herd. It may seem that there is safety in numbers, but more often than not, the herd is eventually headed over a cliff.


Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
Leave a comment if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

www.chartertrust.com • www.moneybasicsradio.com www.globalmarketupdate.net

Leave a Reply

Your email address will not be published. Required fields are marked *