Learn to invest with Buffett

Chapter 12

Chapter 2 Section 3 Don't be a "victim" of blindly following the market

To get the best chance of outperforming the average, investors must be willing to go against the grain of the crowd and must not join other lemmings in their suicide attempts.
--Warren Buffett
Herd mentality often makes investors make decisions against their original wishes, which often leads to investment failure and loss of interests in the end.
Psychologists believe that everyone has a certain degree of herd mentality, and the stock market is no exception. The trading atmosphere in stock market transactions often has a certain impact on investors' decision-making.Investors who go to the sales department of a securities company to engage in transactions on the spot probably have the experience of being influenced by the trading atmosphere, and finally buy or sell involuntarily following the atmosphere, because investors generally do not take their hard-earned money to buy or sell. adventure.This kind of stockholders' herd mentality determines the atmosphere of the stock market, and the stock market atmosphere affects the behavior of investors, which is called the "herd effect". The "herd effect" often makes investors make decisions against their original wishes. If this herd mentality cannot be treated rationally, it will often lead to investment failure and loss of investment interests.Some investors could have made profits by continuing to hold shares, but due to the influence of the market atmosphere, they finally missed the good opportunity; although some investors knew that the stock price had been hyped to unreasonable heights by speculators, due to the "herd effect", As a result, he followed others to buy and was finally locked up.

Buffett has not forgotten a famous saying in the Wall Street stock market, "The stock market bottoms out in despair, is born in pessimism, rises in joy, and disappears in madness." He eventually became the beneficiary of this sentence.

In 1968, the Wall Street stock market showed unprecedented prosperity. The Dow Jones Index rose all the way.People are scrambling to pass one stock information that can make a fortune one after another, and at the same time, they are confused by the sudden wealth.For a time, Wall Street seemed to be full of gold, and you could become a millionaire in just a few moments.

In the face of such a prosperous stock market, Buffett has been doing little for nearly half a year, and he spends more time just observing and thinking.As the tide rolled, Buffett watched calmly, refusing to be seduced by "money", and his determination and perseverance are truly unparalleled.

During the heyday of the Wall Street stock market, Buffett announced the dissolution of the partnership.A partnership company focused on stock market investment announced its dissolution, and the famous Warren will withdraw from stock market operations.People were stunned by the news and couldn't believe it.

The partnership retained only two investments: Berkshire Corporation and Davisfield Retail Stores, and the partners could choose stock or cash in either venture.Buffett chose stocks himself, and by then he had a fortune of more than $250 million.

And just before the end of the year, a miracle happened.The bullishness of the stock market is gradually exhausted, and the index has fluctuated several times, which is frightening.Only then did people think of Buffett from Omaha and the disbanded partnership.

However, Buffett's last investment was still extremely beautiful. In 1968, the partnership firm locked in a high profit, surpassing the Dow Jones Index by nearly 30 percentage points. Buffett called it an abnormal omen.Since then, the stock market has been falling all the way, "nightmare" after another, and the bear market lasted for several years. Countless people's dreams of getting rich were all shattered, and they suffered heavy losses, which confirmed Buffett's prediction.

Buffett once told a story that described people's herd mentality.

There was an oil prospector who went to heaven after he died. When he went to a crossroad, he saw a road sign, one for hell and one for heaven. Go straight to the signpost and find it at the front. There is a special compound for oil prospectors, that is, oil prospectors who go to heaven after death, but St. Peter who is guarding the door said: "You are qualified to enter this place." The problem is that it’s full and there’s not a single seat left, so I’m sorry you might have to go to hell.” The prospector said, “May I have a word with the people inside.” Peter said, “This Yes." He shouted loudly: "Oil has been found in Hell." Then these oil prospectors inside flocked out to Hell to find oil.At this time, St. Peter said that the inside is empty and you can come in.At this time, the man hesitated there for a long time, wanted to enter but stopped, and after thinking for a while, he said: "Forget it, I'd better go with them, maybe there is indeed oil there."

Buffett also told a story about lemmings:

There is a kind of animal called lemmings. This lemming lives in groups, and its reproduction rate is particularly large. A large group of lemmings often live together, but they migrate every year. I don’t know where they migrate. Anyway, there are leaders , Wherever you go, a bunch of them will follow, and finally you have nowhere to go, and you are at the beach. When you see the sea, you just jump into the sea. There is no goal in jumping into the sea. You continue to swim and swim, and finally die in the sea. This is a mentality that investors should avoid the most.

Observing lemmings gives us insight into the psychology of crowd behavior, a key fact of life in the stock market.As Buffett puts it: "The shortcoming is going the traditional way. As a group, lemmings may get a bad rap, but individual lemmings never get a bad rap.

Because financial markets are strongly influenced by the behavior of the masses, investment professionals have long been interested in theories of the psychology of human behavior.

There are so many well-educated and experienced professional investors on Wall Street, but there is no more logical and rational force in the market.In fact, the stocks with the largest percentage of institutional investors are the ones with the most volatile prices.Large swings in stock prices have more to do with the lemming-like behavior of institutional investors than with the total returns of the companies those investors own.

The inability of most portfolio managers to outperform the major indices is not due to intelligence but to the decision-making process.He argues that most institutional decisions are made by a group of people or a committee with a strong desire to be consistent with usual portfolio safety and security actions.These alternative money-manager institutions equate "safe" with "average."Following standard diversification behavior, whether rational or irrational, is not the result of independent thinking.

Now in the stock market, you can see this phenomenon. During the bull market, everyone talks about how to make a good profit in stocks. The most people enter the market, and the trading volume soars, reaching "astronomical volume and sky-high prices."Many people don't know that this is actually caused by the herd mentality of stockholders.As a result, stocks that have reached sky-high prices do not last long, but suddenly fall, and there are many victims.Therefore, there is a saying in the stock market that "out of 10 people trade in stocks, 7 people lose money, 2 people can get even, and only 1 person can make money".This is the best advice for investors who always want to keep up with the trend.
In the stock market, to get the best chance of outperforming the average, investors must be careful about "herding" and must not join other lemmings in their suicide attempts.

Investment motto:

Because most stockholders don't think about the real situation of the stock market, they only follow the trend, so when the popularity is the weakest, no one dares to buy, and waits for everyone to rush in before following them.In fact, the best time to buy is when the boom is the lowest and the cost is the smallest; the best time to sell is when the boom is the hottest, the price is higher, and the profit is the largest.The risk of buying low is small; the risk of buying high is high and you may lose everything.

(End of this chapter)