Sometimes being at one with a crowd can be nice, eg at rock concerts it adds to the ambience and safety in numbers can provide comfort. However, when crowds turn they can be dangerous – you might get trampled! In fact a wariness of crowds is essential to successful investing.
The Japanese bubble of the late 1980s, the Asian miracle of the mid-1990s, US tech stocks in the late 1990s, US housing and dodgy credit in the mid 2000s all had one thing in common. Investors had jumped on a bandwagon in a euphoric mass resulting in assets that became overloved and overvalued and ripe for a crash that of course happened. As Warren Buffet once observed the key is to “be fearful when others are greedy and greedy when others are fearful.”
But what’s the logic behind this wariness of crowds? Is it as simple as doing the opposite to what the crowd is doing with their investments? What is the crowd telling us now?
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