{"id":8807,"date":"2017-03-18T17:17:53","date_gmt":"2017-03-18T16:17:53","guid":{"rendered":"https:\/\/www.smolio.ch\/wissen\/herd-effect-in-investing-why-we-care-less-about-the-direction-of-our-investments-when-we-run-together\/"},"modified":"2024-12-09T21:28:33","modified_gmt":"2024-12-09T20:28:33","slug":"herd-effect-in-investing-why-we-care-less-about-the-direction-of-our-investments-when-we-run-together","status":"publish","type":"post","link":"https:\/\/www.smolio.ch\/en\/wissen\/herd-effect-in-investing-why-we-care-less-about-the-direction-of-our-investments-when-we-run-together\/","title":{"rendered":"Herd effect in investing: Why we care less about the direction of our investments when we run together"},"content":{"rendered":"Lesedauer<\/span> 3<\/span> Minuten<\/span><\/span>\n

Why were we all so wrong? The financial crisis, Brexit, the collapse of a company. A low, a high, whatever. The buzzword is the \u201cwe\u201d. Because \u201cI\u201d was critical, skeptical, cautious \u2026 But \u201cwe\u201d were all sooo sure. Why do we happily rush into investments when everyone else is doing it? And why do we let fear infect us when there is \u201cthunder and lightning\u201d? The herd effect in investing. <\/p>\n\n\n\n

The share price is a price. It results from the supply of shares and the demand for shares. The price reflects the assessment of all investors about the value of a company in one price (the share price) on the basis of all information available today. The price therefore contains all known and expected developments. Scientists call this pricing mechanism the efficient market hypothesis<\/a>. Eugene Fama was even awarded a Nobel Prize for it. So far so good.<\/p>\n\n

How does the demand arise?<\/h2>\n\n

On the one hand, there are the historical values. If a share or an index has performed well in the past, we also trust it in the future. And then there are the forecasts. If shares or indices follow a trend, we look to the future with confidence. Although every sales prospectus for financial investments states more than clearly that \u201cPast performance is not a reliable indicator of future performance\u201d. But after all, there is the behavior of other investors. And they can\u2019t be wrong. Can\u2019t they? <\/p>\n\n

The herd effect in investing<\/h2>\n\n

Here\u2019s a little history. After the US lifted the embargo on Cuba, the share with the melodious name \u201cHavana Holding SA\u201d soared. Of course, right? That encouraged some investors to join in. It\u2019s just a shame that the <\/span>Although the share is named after the capital of Cuba, it otherwise has very little to do with the country. This is because the company behind it comes from Buenos Aires, Argentina, where it operates coffee shops.\nAnd, of course, the share price has since recovered.\nToo bad for the herd animals. <\/span><\/p>\n\n

The herd effect in investing describes the phenomenon of following the crowd with our decisions. Almost blindly. Even into the abyss. Because all the others can\u2019t be wrong. At least no more wrong than me. And what\u2019s more, I don\u2019t have to think about it myself. That\u2019s convenient. And I can also point to the others if I\u2019m wrong. After all, we were all wrong. That\u2019s comforting. Maybe at least a little. Andr\u00e9 Kostolany<\/a>, a well-known stock market and financial expert, once said: \u201cThe stock market only reacts to facts ten percent of the time. Everything else is psychology.\u201d <\/p>\n\n

But shared suffering is not just shared suffering. It can also be multiplied by wrong financial decisions or omissions. And there is a simple rule of thumb for this: the faster the masses run, the more uncontrollably the individual runs. In other words: \u201ceveryone\u201d can also be wrong. If everyone buys a certain asset class, it becomes more expensive. This is logical, simply because demand increases. Not because the fundamental facts change. This applies to real estate. For infrastructure. Or for gold. Or cryptos<\/a>. <\/p>\n\n

Summary: Herd effect in investing<\/h2><\/div>\n\n

Most people feel comfortable when they belong to a group. In the capital market, too, people follow the decisions of other people \u2013 they behave like other members of a group. They buy what others buy, they buy more the more the stock markets rise. They sell what others are selling and sell when the stock markets fall. The herd effect in investing describes precisely this behavior. A stock market saying by Baron Rothschild<\/a> sums it up succinctly: \u201cBuy when the cannons are thundering, sell when the violins are playing.\u201d And builds an entire investment strategy on it. You don\u2019t have to become an expert in anti-cyclical investing. Butwe think you should dare to<\/strong> <\/span>be critical <\/b> when making financial decisions<\/strong> <\/span>, especially when others are not. <\/b>Because it\u2019s your money, not other people\u2019s. <\/p>\n\n