Investing School (Be Brave and Don’t Follow Fashion)

One of the most enduring realities in investing is the fact that most small investors seem to end up buying stocks at the top of the market and selling at the bottom.  One of the major reasons for this is the fact that investors seem to let their emotions dominate when making investment choices. Two emotions in particular seem to dominate when making investment decisions:: fear and following the crowd.

First, let’s talk about following the crowd, what West Indians call “follow fashion.” The adverse effect following fashion has on investment results is rather straightforward. When a person sees others do well in an asset class or stock, he or she decides to jump on the bandwagon and buy some too. What tends to happen is that by the time “follow fashion” people invest in the stock, the stock’s price has ran up so much that it has become overvalued. Of course, the bubble eventually breaks and people that bought at the top lose a lot of money.  “Follow Fashion” people end up buying at the top of a bubble.

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