One writer to document this was Charles Mackay, author of ‘Extraordinary Popular Delusions and the Madness of Crowds’, published over 150 years ago in 1841 and often referred to as the greatest book on investing ever written.
In it he chronicles the waves of irrational behaviour that seem to affect mankind at regular intervals, what happens is that some individual or company of standing decides to do something, say buy or sell shares, if they have a good audience some will follow suit, this leads to then more people jumping onto the idea and so on until following suit is no longer the best option, yet we continue to feel the need to anyway! It is this Keeping up with the Joneses mentality that is the killer.
Always Remember – As an individual investor you are ideally placed to stand outside the crowd. No one can sack you from your job as your own investment manager for failing to follow a fad.
Experienced investors always watch for signs of market tops. The rushing in of the public is invariably an indication that such a top has been reached, shortly to be followed by a crash.
Joe Kennedy, Millionaire father of JFK, is reputed to have got out of the market before the great crash in 1929 when a shoeshine boy offered him tips, his rationale being that if a lowly shoeshine biy had become an expert it was time for the real experts to get out!
Recognising market cycles will help you to stand aside from the naive investor who believes that rising markets go on forever. Equally, you will realise that bad times always end. In fact, they provide the best opportunity to prepare for successful investing in the fearful market that’s sure to follow.
I guess my underlying point in all this is to advise you to stay away from listening to the negative talk we have been bludgeoned with over the past number of years. Sure, it is true a lot of people have been caught out with investments that have not done well, but this is because they bought at the height of the markets, not because they were shrewd and stuck their head above parapet. They followed the crowd and got burnt, its that simple.
On the contrary, now is absolutely the correct time to be getting involved in some sort of investment product, before the crowd. Things are settling, people are beginning to think towards their future again not back at the gloom, our window is open but shutting fast. Be the pied piper, not a rat.