Stumble it!

The desire for social acceptance is near the top of everyone’s itinerary. We tend to feel uncomfortable and anxious when we go against the grain. But as Richard Conniff explains, when it comes to the stock market, mimicking others is perhaps the worst thing you can do.

For individual investors, it’s “very difficult to make money” by running with the herd, says Ivo Welch of Brown University, who claims that “herd” behavior rarely influences the stock market. Investors should be wary of the copycat phenomenon that has robbed more Americans than the IRS. Small companies for example, are often the proverbial landmine for the average investor. Information is not as readily available for small enterprises and their trends and business practices can be shrouded with mystery. When the stocks for such companies become hot, investors enter the mix with impulsiveness and irrationality. More often than not, those same stocks will come crashing down quickly and with very little sympathy for the investor. Other problems that haunt investors following the pack, is momentum investing. Momentum investing basically means coordinating you stocks to recent winners and losers in the market. This is often considered a shortcut by investors who are a little wiser and don’t follow trends and fads. Lin Peng, finance Professor at City University of New York’s Baruch College describes another disturbing method of laziness called “excess co-movements.” Excess co-movements are the unfortunate tendency of investors to purchase stocks based on the industry and not the company. This basically means that if Bio-Tech is a hot commodity one sunny day, these investors will rush to purchase company shares related to the industry without giving a hoot as to the company’s financial and social situation. While excess co-movements save time, it almost never works in the long term. There is no legal alternative to spending the time and effort required to get better acquainted with the company you plan to invest in. The world of stocks may give the illusion of blistering speed, but it is often the rational, forward thinking and patient that win big in the long run. This may be contrary to what most Americans perceive, but when it comes to the stock market, different is good.