Investing When Others Withdrawby Andrew Beattie
Herd mentality is leading to more and more destructive rampages down Wall Street. Investing passively by sticking to funds, indexes and other mainstays of the coach potato portfolio is a perfectly acceptable practice. The danger comes when people move from passive investing to an active portfolio, but stick with the behavior of a passive investor. There is a lot of available information for such investors - much of which is true - but accepting it with an uncritical eye and neglecting to check it yourself is what leads to herding. This includes getting the latest and greatest stock tip from your Uncle George. A person can effortlessly become one of the investors that the analysts shepherd into various "must-buy stocks" after they have become overpriced. This is how investors find themselves in the herd when skittish investors flee, causing the stock to plunge farther than it should have (whereupon a more astute investor buys a bargain off your loss). When people buy cars, they try to find the best value for the lowest price; when people buy stocks, they only see the price and, ironically, gravitate toward rising prices. If you are going to invest, you have to check things for yourself in order to find the true value and get the bargains. This takes more time, and it could even cause you to miss out on early gains, but it will tell you when to stay out or when to sell well before the herd hears the bell.