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Herd investing

Bullionstar

Bullionstar

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When it comes to stock investments, it is difficult to make money if you adopted a herd investing mentality. A few months ago, a friend of mine sent me a text to  recommend investing in one of the local stocks, Yongnam. In his texts, he kept praising how good the company was, citing the various exciting business prospects and developments.
I did not solicit for his views on any stock investments before, so I was quite surprised that he tried to induce me to invest in this counter. Furthermore, I am not the sort of person who is easily influenced by others when it comes to stock investment and normally I would do my own research before investing in any counters.
stock market

So I chided him for trying to induce me to invest in Yongnam. Of course he denied flatly and vehemently defended that he was just sharing good stuff. I gave him the benefit of my doubts since he is my good friend, nonetheless, I did not invest in Yongnam.

One of the most common mistakes made by new Singapore investors is the tendency to adopt a herd mentality. Tempted to make quick profits, many novice or inexperienced investors enter the stock market and rely solely on rumors and tips from friends or brokers. As they lack the knowledge to invest on their own, this group of young investors value opinions of friends, brokers or relatives when it comes to investing. I am quite concerned for this group of uneducated investors because many of them will confess their regrets after paying expensive “school fees”.

To a large extent, it is not entirely their fault. Our education system is not shaped to provide guidance on personal finance and investment to our students. Many young adults are suddenly thrust into working life after graduation with no clue on how to devise monthly budget, how to control credit card spending, how to allocate asset and how to plan for retirement.

To make things worse, our local media likes to give lots of attention on how young investors become rich from investing within a short time. I seldom come across any articles on how traders lost money big time. The emphasis promoted by mainstream and online media is always to elaborate how traders become rich through active trading.  I seldom come across detailed stories of how people lost big money dabbling in the stock market. All these factors play a role in encouraging young investors in Singapore to adopt a herd investing mentality fashioned on short- term trading.

To become successful in investing, you must adopt a contrarian approach to investing and you must never buy a stock based on herd mentality, which can be dangerous. Now, obviously, you would be blinded by emotions when others, especially your friends, bragged to you how much profits they made from these counters. When faced with such situation, always control your emotions and apply objective thinking whether the stock is really worth your investments.

Always remember there is no free lunch in this world and if your friends tried to induce you to buy a stock, there could be a motive. A good company often operate in boring business that people seldom talk about or bother to look at. So if your friends or everyone else is talking about a particular stock, it is perhaps time for you to exit or steer clear of this stock!

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6 Comments

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  1. Mon, Mar 29, 2010
    The Straits Times

    RETIRED sailor Goh Tor Zin said he lost $350,000 of his Central Provident Fund savings through bad stock market investments, and yesterday made a radical suggestion at a ministerial dialogue.

    The 59-year-old Kampong Kembangan resident sought a ban on using CPF money for such investments, saying the CPF scheme should stick to its original aims of helping Singaporeans save for their retirement, medical and housing needs: ‘When I retired, I collected only $35,000. I lost $350,000. The sum may be small for some, but for me, I can buy many packets of chicken rice.’

    Mr Goh, who is unmarried and lives with his 91-year-old father in a five-room Lengkong Tiga flat, said he made a similar suggestion to the CPF when he collected his CPF money on turning 55: ‘They told me that I don’t have to buy (shares), and that no one forced me to do so. I said, ‘Yes if you don’t sell drugs, I won’t buy drugs. So you are not wrong, I am also not wrong’.’

  2. Hi there.
    Just wanna say I like your write up on young investors being influenced by friends and investors. I myself am a victim of such incidents and it has cost me dearly and it al started when i just started off playing with stocks and have absolutely no knowledge on them. Follow blindly without thinking and only hearing the “good side” of their stories.
    Hope I had been more rational then.

  3. Good observation Gerard.
    It is common behaviour for lay investors to talk about their recent investments. It is not their fault. Unconsciously, they are seeking to get comfort and assurance. A seasoned player would generally prefer to go quiet instead, for good reasons.
    A novice investor likes to boast about how much their make (but does not say how much they lose). A pro knows it is not how much you make, but how much you keep over the ultra long run.
    Most investors only know how to play offense. They have almost non-existent defense.
    The pros know it is the defense that wins over the long haul.

  4. We all learn from investment mistakes. Sometimes our friends and relatives tell us only the half-truths. So always be cynical when it comes to investing.

  5. Thanks Gideon. You sound like a football manager but I like your analogy.

  6. Thank you for sharing Uncle 8888! Such article are so rare nowadays. Hopefully there can be more of such articles to warn novice investors the peril of investing in shares.

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