This article originally published in The Northern Daily Leader on 7 July 2012.
Most people are familiar with the famous poem by Robert Frost, ‘The Road Not Taken’, which contains the well-known line “Two roads diverged in a wood, and I — I took the one less traveled by”. There are a number of different interpretations of that line, and indeed the poem itself, but a common view is that the poem encourages us to be non-conformists. Not to be like everybody else and follow the well-worn road, but to be different, to take a less-travelled path.
Of course, being different to everyone else is easier said than done. There’s a certain sense of safety in numbers, and people who stand out from the crowd can often find themselves occupying a lonely spot, sometimes even a target for the crowd. How we look and dress for example, lets us either blend into or stand out from the crowd. As a teenager I had a standard uniform to wear to parties and other social events: brown patterned-leather shoes, acid-wash jeans, a paisley buttoned shirt and a bandanna around my neck. Did I look ridiculous? I sure did, but so did 98% of the rest of the kids at the party who were all dressed exactly like I was. Conformity may be boring, but it sure does a good job of hiding a terrible dress sense.
The pressure on investors to conform is no less intense than that faced by a shy teenager at a dance party. It’s nicely illustrated by the term ‘investor herding’, which describes how many investors behave in the same manner without any prior planning. You see on the news that the stock market is falling; a friend tells you that he’s sold up and put everything in cash; your cab driver tells you he heard someone on the radio predict a financial meltdown; and you receive an email from someone you’ve never met telling you that the only asset you should hold is gold or farmland. So you call up your stockbroker or advisor and tell him to sell all your investments, invariably just before the market recovers.
If you’ve ever done this, or contemplated doing it, then you have joined the herd, where behaviour becomes irrational and driven by emotion. Analysis and rationality get trampled underfoot as the herd rushes for the exit. Of course, it can happen in reverse as investors jump on the latest bandwagon, be it uranium, gold or poppies, only for the wheels to spectacularly fall off later on. Standing apart from the crowd when it comes to investing can be difficult, but remember that rewards seldom come without effort.