Herd mentality

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shuresm7b1
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Herd mentality

Post by shuresm7b1 » Wed Sep 13, 2017 10:01 am

I was visiting with neighbors last night having a glass of wine and some nice conversation at which point the topic of investing in money came up. It might have even been me that brought it up I don't remember, but it became a very pleasant conversation with my neighbors and they had me questioning my reasons for certain ways of investing.

I mentioned that I was reading security analysis books and trying to learn a bit more about fundamentals and they mentioned that their way of investing is more That of buying popular stocks like Apple, Google, and Johnson & Johnson which are stocks with dividends but also popular stocks that have less dividends and more growth. They seem to treat it more like gambling than actual investing but they seem to be having some level of success with this gambling. I call it gambling because they really didn't seem to know any of the fundamental characteristics about the companies other than maybe a P/E.


Now these are older people in their 80s living very nice lives and they've been around the block a few times and we're very intelligent people with strong backgrounds so I was quite curious to know what is the success rate for herd mentality investing where people are not looking at the fundamentals or not really understanding much more about where the market is at.

I mentioned all of these crashes from 1929 on up but they insisted after those crashes the market keeps going up. It always goes up. I really didn't know how to respond to this because I mean the Dow is at its all-time high so I guess overtime it does. What am I missing here? To eliminate risk as much as possible surely it's critical to understand a lot about the things you're invested in? No?

The Wizard
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Re: Herd mentality

Post by The Wizard » Wed Sep 13, 2017 10:05 am

Buying individual stocks that have done well recently isn't a great long-term strategy.
Bigger question might be their total asset/income picture.
If that 80's couple has decent income from SS+ pensions, then investing becomes a playtime activity to a degree...
Last edited by The Wizard on Wed Sep 13, 2017 10:08 am, edited 1 time in total.
Attempted new signature...

ResearchMed
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Re: Herd mentality

Post by ResearchMed » Wed Sep 13, 2017 10:06 am

shuresm7b1 wrote:
Wed Sep 13, 2017 10:01 am
I was visiting with neighbors last night having a glass of wine and some nice conversation at which point the topic of investing in money came up. It might have even been me that brought it up I don't remember, but it became a very pleasant conversation with my neighbors and they had me questioning my reasons for certain ways of investing.

I mentioned that I was reading security analysis books and trying to learn a bit more about fundamentals and they mentioned that their way of investing is more That of buying popular stocks like Apple, Google, and Johnson & Johnson which are stocks with dividends but also popular stocks that have less dividends and more growth. They seem to treat it more like gambling than actual investing but they seem to be having some level of success with this gambling. I call it gambling because they really didn't seem to know any of the fundamental characteristics about the companies other than maybe a P/E.


Now these are older people in their 80s living very nice lives and they've been around the block a few times and we're very intelligent people with strong backgrounds so I was quite curious to know what is the success rate for herd mentality investing where people are not looking at the fundamentals or not really understanding much more about where the market is at.

I mentioned all of these crashes from 1929 on up but they insisted after those crashes the market keeps going up. It always goes up. I really didn't know how to respond to this because I mean the Dow is at its all-time high so I guess overtime it does. What am I missing here? To eliminate risk as much as possible surely it's critical to understand a lot about the things you're invested in? No?
They are "living very nice". Perhaps they'd be living "much, much nicer" by their 80's if they hadn't been using a "gambling" model.
Or maybe they were indeed very fortunate, but don't overlook the fact that you don't know how well they actually did in terms of percentage annualized returns. Maybe they even got their money from an inheritance and have been slowly losing some...
Do you know for sure "how they've done" with their actual investing history?

RM
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dbr
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Re: Herd mentality

Post by dbr » Wed Sep 13, 2017 10:11 am

Actually no. The fact that the market always goes up means any idiot can be successful as long as they just keep buying and don't make the stupid mistake of selling out in a panic at market bottoms. What we have today and have had for a long time is the good luck of being a participant in the American economy for the long run of any four or five or six decades in the period 1945-2017. Even Warren Buffet and Jack Bogle epitomize that.

But these folks have probably also done some other things that are critical to their present situation. Specifically they were smart, worked hard, earned good incomes, lived beneath their means, and saved and invested the excess. They probably also did not have destructive divorces, debilitating illnesses, drug addicted children, extended unemployment, and so on -- or maybe they did but they handled it somehow.

Oh yeah, another poster reminded about the pensions, and also those generations up to recently that have gained far more from Social Security than it cost them to pay in.

shuresm7b1
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Re: Herd mentality

Post by shuresm7b1 » Wed Sep 13, 2017 10:14 am

The Wizard wrote:
Wed Sep 13, 2017 10:05 am
Buying individual stocks that have done well recently isn't a great long-term strategy.
Bigger question might be their total asset/income picture.
If that 80's couple has decent income from SS+ pensions, then investing becomes a playtime activity to a degree...
I'm guessing you're right and they have enough other income to treat it as a game. It seems that even a 10-year downturn in the market doesn't affect them enough to impact them.

shuresm7b1
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Re: Herd mentality

Post by shuresm7b1 » Wed Sep 13, 2017 10:16 am

ResearchMed wrote:
Wed Sep 13, 2017 10:06 am
shuresm7b1 wrote:
Wed Sep 13, 2017 10:01 am
I was visiting with neighbors last night having a glass of wine and some nice conversation at which point the topic of investing in money came up. It might have even been me that brought it up I don't remember, but it became a very pleasant conversation with my neighbors and they had me questioning my reasons for certain ways of investing.

I mentioned that I was reading security analysis books and trying to learn a bit more about fundamentals and they mentioned that their way of investing is more That of buying popular stocks like Apple, Google, and Johnson & Johnson which are stocks with dividends but also popular stocks that have less dividends and more growth. They seem to treat it more like gambling than actual investing but they seem to be having some level of success with this gambling. I call it gambling because they really didn't seem to know any of the fundamental characteristics about the companies other than maybe a P/E.


Now these are older people in their 80s living very nice lives and they've been around the block a few times and we're very intelligent people with strong backgrounds so I was quite curious to know what is the success rate for herd mentality investing where people are not looking at the fundamentals or not really understanding much more about where the market is at.

I mentioned all of these crashes from 1929 on up but they insisted after those crashes the market keeps going up. It always goes up. I really didn't know how to respond to this because I mean the Dow is at its all-time high so I guess overtime it does. What am I missing here? To eliminate risk as much as possible surely it's critical to understand a lot about the things you're invested in? No?
They are "living very nice". Perhaps they'd be living "much, much nicer" by their 80's if they hadn't been using a "gambling" model.
Or maybe they were indeed very fortunate, but don't overlook the fact that you don't know how well they actually did in terms of percentage annualized returns. Maybe they even got their money from an inheritance and have been slowly losing some...
Do you know for sure "how they've done" with their actual investing history?

RM
You're right I actually have no idea how they are really doing but they have a nice house and lots of bravado. You never know who your neighbors really are until you know.

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DaftInvestor
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Re: Herd mentality

Post by DaftInvestor » Wed Sep 13, 2017 10:17 am

Personally I wouldn't try to change their mind about anything they are doing financially - at their age - you likely won't change their minds. There are plenty of other topics to talk about (the weather, football, the equifax breech, etc.).

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Re: Herd mentality

Post by asif408 » Wed Sep 13, 2017 10:18 am

People who can accurately calculate their investing returns over a long period of time are about as numerous as those who can with any degree of accuracy calculate how many calories they are eating on a daily basis over many years. Which is to say, not many.

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Re: Herd mentality

Post by bloom2708 » Wed Sep 13, 2017 10:21 am

DaftInvestor wrote:
Wed Sep 13, 2017 10:17 am
Personally I wouldn't try to change their mind about anything they are doing financially - at their age - you likely won't change their minds. There are plenty of other topics to talk about (the weather, football, the equifax breech, etc.).
+1

It interesting that nearly any strategy works in a 7-8 year stretch where the markets pretty much go only up. That may continue or may abruptly end.
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financeidiot
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Re: Herd mentality

Post by financeidiot » Wed Sep 13, 2017 10:22 am

People absolutely can outperform the market with individual stock picks. It's rare to always be right, but when the market's up, everyone looks like a genius.

Your neighbors are probably not comparing their results against the performance of comparable index funds with an appropriate asset allocation for their risk tolerance. They may also be overlooking losses in favor of gains. But if they did all this and beat the game, good on them.

shuresm7b1
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Re: Herd mentality

Post by shuresm7b1 » Wed Sep 13, 2017 10:24 am

dbr wrote:
Wed Sep 13, 2017 10:11 am
Actually no. The fact that the market always goes up means any idiot can be successful as long as they just keep buying and don't make the stupid mistake of selling out in a panic at market bottoms. What we have today and have had for a long time is the good luck of being a participant in the American economy for the long run of any four or five or six decades in the period 1945-2017. Even Warren Buffet and Jack Bogle epitomize that.

But these folks have probably also done some other things that are critical to their present situation. Specifically they were smart, worked hard, earned good incomes, lived beneath their means, and saved and invested the excess. They probably also did not have destructive divorces, debilitating illnesses, drug addicted children, extended unemployment, and so on -- or maybe they did but they handled it somehow.

Oh yeah, another poster reminded about the pensions, and also those generations up to recently that have gained far more from Social Security than it cost them to pay in.
I'm mostly interested in why they would have the herd mentality investing and feel it's such a good successful way to go. They do seem to have many years of experience doing it and with success. You know back to addressing the Dow keeps going up and up and up so it works.

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Re: Herd mentality

Post by shuresm7b1 » Wed Sep 13, 2017 10:30 am

DaftInvestor wrote:
Wed Sep 13, 2017 10:17 am
Personally I wouldn't try to change their mind about anything they are doing financially - at their age - you likely won't change their minds. There are plenty of other topics to talk about (the weather, football, the equifax breech, etc.).
What made it enjoyable is it was a very casual conversation with everybody interested in facts and presenting more information that could be understood. Even for myself I kept switching back and forth between teacher and student trying to learn something and trying to present a fact of my own at the same time. It was a lot of fun and got me thinking about my own investing ways which really shows me that the more people I can hold intelligent financial conversations with the better I'm likely to understand what it is I'm actually doing.

dbr
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Re: Herd mentality

Post by dbr » Wed Sep 13, 2017 10:31 am

shuresm7b1 wrote:
Wed Sep 13, 2017 10:24 am


I'm mostly interested in why they would have the herd mentality investing and feel it's such a good successful way to go. They do seem to have many years of experience doing it and with success. You know back to addressing the Dow keeps going up and up and up so it works.
It might be that trying to figure out investing and manage one's money accordingly involves the herd mentality of a certain herd more than what they are doing. That is especially true if the result is misplaced confidence that one can time markets or pick stocks. There is plenty of herd mentality in that as well.

The real herd mentality about this would be something more along the lines of "don't invest because the market is fixed" and besides "I can put it on my card today and I really need it, especially since my car/truck isn't as fast/big as his car/truck" etc.

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Re: Herd mentality

Post by avalpert » Wed Sep 13, 2017 10:31 am

dbr wrote:
Wed Sep 13, 2017 10:11 am
Actually no. The fact that the market always goes up means any idiot can be successful as long as they just keep buying and don't make the stupid mistake of selling out in a panic at market bottoms.
I don't think that is really true for people buying individual stocks. Someone who bought Lucent in '99 didn't do themselves any favors by not selling at the market bottom in 2001. Even in the current market, someone holding on to Sears waiting for the rebound is likely to be highly disappointed.

deltaneutral83
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Re: Herd mentality

Post by deltaneutral83 » Wed Sep 13, 2017 10:32 am

The problem is that folks who have a nice $1-2MM net worth could have likely had a $3-5MM net worth had they indexed, or dare I say used "a guy" and would have still had much more instead of using a significant portion of their money on single stocks. The difference (say $1.5MM and $4MM) is huge monetarily but not in lifestyle to an 80 year old. It also taps into the theory that humans don't take into account what "might have been" because it's not visible.
Last edited by deltaneutral83 on Wed Sep 13, 2017 10:33 am, edited 1 time in total.

shuresm7b1
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Re: Herd mentality

Post by shuresm7b1 » Wed Sep 13, 2017 10:32 am

asif408 wrote:
Wed Sep 13, 2017 10:18 am
People who can accurately calculate their investing returns over a long period of time are about as numerous as those who can with any degree of accuracy calculate how many calories they are eating on a daily basis over many years. Which is to say, not many.
That sir is on my to do list. Some crazy Excel formula I'm going to have to implement

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flossy21
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Re: Herd mentality

Post by flossy21 » Wed Sep 13, 2017 10:36 am

It's all well and good until you run into an Enron or a Worldcom and they leave you with nothing after declaring Bankruptcy.

https://en.wikipedia.org/wiki/Enron

https://en.wikipedia.org/wiki/MCI_Inc.

dbr
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Re: Herd mentality

Post by dbr » Wed Sep 13, 2017 10:36 am

avalpert wrote:
Wed Sep 13, 2017 10:31 am
dbr wrote:
Wed Sep 13, 2017 10:11 am
Actually no. The fact that the market always goes up means any idiot can be successful as long as they just keep buying and don't make the stupid mistake of selling out in a panic at market bottoms.
I don't think that is really true for people buying individual stocks. Someone who bought Lucent in '99 didn't do themselves any favors by not selling at the market bottom in 2001. Even in the current market, someone holding on to Sears waiting for the rebound is likely to be highly disappointed.
I guess "can be" is less certain than "certainly will." I worked for a company where generations of people retired comfortably by putting their savings into the employee stock purchase program. The stock did well, but more importantly these were the kind of people who saved. There are probably more stocks that would have behaved like that than would have failed. If I had an investing failure over the last thirty years it was exercise and cash out when my stock options expired rather than exercise and hold. Of course that was because I know as you do that single stock risk is playing with fire.

shuresm7b1
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Re: Herd mentality

Post by shuresm7b1 » Wed Sep 13, 2017 10:37 am

avalpert wrote:
Wed Sep 13, 2017 10:31 am
dbr wrote:
Wed Sep 13, 2017 10:11 am
Actually no. The fact that the market always goes up means any idiot can be successful as long as they just keep buying and don't make the stupid mistake of selling out in a panic at market bottoms.
I don't think that is really true for people buying individual stocks. Someone who bought Lucent in '99 didn't do themselves any favors by not selling at the market bottom in 2001. Even in the current market, someone holding on to Sears waiting for the rebound is likely to be highly disappointed.
Ding ding ding we got a winner. You're absolutely right that certain individual stocks will never ever ever rebound. Thanks. At my next wine tasting I will win this round and be victorious

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Re: Herd mentality

Post by livesoft » Wed Sep 13, 2017 10:39 am

I have had a few of these conversations. I mostly see that folks don't actually know how other strategies performed compared to their own strategy or what their advisor did for them. It was not unusual to hear someone say, "My stocks were up 10% last year" when in fact the S&P 500 was up 15%.

So for folks who invest in individual stocks, sometimes they will do worse and sometimes they will do better. If they do worse by 2% a year, it is probably no big sin and just the cost of their hobby. For the Bogleherd even the difference of 0.2% between an Admiral fund and an Investor-class fund is too much to pay for a hobby.

I will say also that after years of friendly banter, two of my regular buddies switched to all index funds because it was just easier and nothing to pay attention to.
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shuresm7b1
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Re: Herd mentality

Post by shuresm7b1 » Wed Sep 13, 2017 10:40 am

dbr wrote:
Wed Sep 13, 2017 10:31 am
shuresm7b1 wrote:
Wed Sep 13, 2017 10:24 am


I'm mostly interested in why they would have the herd mentality investing and feel it's such a good successful way to go. They do seem to have many years of experience doing it and with success. You know back to addressing the Dow keeps going up and up and up so it works.
It might be that trying to figure out investing and manage one's money accordingly involves the herd mentality of a certain herd more than what they are doing. That is especially true if the result is misplaced confidence that one can time markets or pick stocks. There is plenty of herd mentality in that as well.

The real herd mentality about this would be something more along the lines of "don't invest because the market is fixed" and besides "I can put it on my card today and I really need it, especially since my car/truck isn't as fast/big as his car/truck" etc.
I think that's a different herd mentality which is the groups that do debt. I got the impression last night that these guys don't do any debt so it was a very interesting herd mentality for me because I don't either.

chevca
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Re: Herd mentality

Post by chevca » Wed Sep 13, 2017 10:51 am

I don't see where the "herd mentality" comment comes from.

They seem to have made a plan and stuck too it. It doesn't sound like the time their stock buying and selling. They seem to buy and hold, just don't index. Fairly Boglehead'ish in some ways. Almost sounds like they somewhat hold a blue ship stock fund.

Just because they don't know the in-depth parts of investing and read up on the companies, doesn't mean they're following the herd, IMO. Many Bogleheads, myself included, don't know the in-depths of all this stuff and don't really care to.

We're all gambling by investing in stocks, aren't we? I'd say they're doing fine. Glad it was a pleasant conversation. Money talk doesn't always go that way.

dbr
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Re: Herd mentality

Post by dbr » Wed Sep 13, 2017 11:01 am

chevca wrote:
Wed Sep 13, 2017 10:51 am
I don't see where the "herd mentality" comment comes from.
Herd mentality should refer to doing something because it is constantly heard about and practiced without criticism or understanding within a certain affinity group, a herd. I agree what was described is not obviously herd mentality.

There is probably a significant amount of herd mentality going on here on this forum, maybe more than with the people in the OP.

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Re: Herd mentality

Post by shuresm7b1 » Wed Sep 13, 2017 11:20 am

dbr wrote:
Wed Sep 13, 2017 11:01 am
chevca wrote:
Wed Sep 13, 2017 10:51 am
I don't see where the "herd mentality" comment comes from.
Herd mentality should refer to doing something because it is constantly heard about and practiced without criticism or understanding within a certain affinity group, a herd. I agree what was described is not obviously herd mentality.

There is probably a significant amount of herd mentality going on here on this forum, maybe more than with the people in the OP.
Like the FANG stocks they buy just because they are popular.

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Re: Herd mentality

Post by shuresm7b1 » Wed Sep 13, 2017 11:21 am

chevca wrote:
Wed Sep 13, 2017 10:51 am
I don't see where the "herd mentality" comment comes from.

They seem to have made a plan and stuck too it. It doesn't sound like the time their stock buying and selling. They seem to buy and hold, just don't index. Fairly Boglehead'ish in some ways. Almost sounds like they somewhat hold a blue ship stock fund.

Just because they don't know the in-depth parts of investing and read up on the companies, doesn't mean they're following the herd, IMO. Many Bogleheads, myself included, don't know the in-depths of all this stuff and don't really care to.

We're all gambling by investing in stocks, aren't we? I'd say they're doing fine. Glad it was a pleasant conversation. Money talk doesn't always go that way.
They said they don't buy and hold that they just buy with popular stocks and sell if they lose money and buy something else that's popular. That's why I made the herd mentality comment because it just seems like they're following whatever is popular

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Re: Herd mentality

Post by onthecusp » Wed Sep 13, 2017 11:31 am

Back in the late 90s there were many articles espousing that people should buy what they know. Like coffee from that new chain? Buy Starbucks. Like your computer? Buy Apple or Microsoft. Like Old Navy clothes? Buy Gap stores. Like that big box store? Buy Best Buy. I think your neighbors joined that herd.

It all worked great until it didn't, but then it was someone else's fault. The tech bust hit everyone in 2000, the housing bubble hit everyone in 2008. "My instincts were just fine" and "I've made great money except when everything is blowing up." are self evidently correct statements but ignore the fact that the strategy did NOT work.

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Re: Herd mentality

Post by meowcat » Wed Sep 13, 2017 11:33 am

shuresm7b1 wrote:
Wed Sep 13, 2017 10:16 am
You're right I actually have no idea how they are really doing but they have a nice house and lots of bravado. You never know who your neighbors really are until you know.
This is very important. You said it yourself, you just don't know. Many, many folks just like them (or appears to be like them) are struggling with insurmountable debt and sweating over their desk each night wondering how they're going to pay their bills. It could all be smoke and mirrors and their house of cards could come tumbling down at any time. Or not. The point is, you just don't know.
More people should learn to tell their dollars where to go instead of asking them where they went. | -Roger Babson

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Re: Herd mentality

Post by BHUser27 » Wed Sep 13, 2017 11:33 am

asif408 wrote:
Wed Sep 13, 2017 10:18 am
People who can accurately calculate their investing returns over a long period of time are about as numerous as those who can with any degree of accuracy calculate how many calories they are eating on a daily basis over many years. Which is to say, not many.
This^^^

People who can accurately state their <gambling> returns over <any> period of time are few and far between as well.

Spouse 1: "Honey, I just won $100 from that slot machine"
Spouse 2: "Great, how much of the $1000 you brought to gamble with is left now?"
Spouse 1: "$200"
Spouse 2: "Ahh, so you are down $800 for the trip then?"
Spouse 1: "Yeah, but I got 2 free drinks while I was playing!"
Spouse 2: "You mean, you got 2 $400 drinks - yes?"
Spouse 1: "You're no fun, I'm going to the pool"

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celia
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Re: Herd mentality

Post by celia » Wed Sep 13, 2017 11:54 am

I think Bogleheads is a herd mentality. You're just in a different herd than they are. :oops:

But how many of us know what stocks are in our funds? Read the funds' annual reports? Do the "deep" research you do?
(Put me in the "negative" column for these questions--most of the time.)

Many people here focus on the tax impacts, minimize taxes after 70.5 by doing early Roth conversions, take SS at an optimal time for themselves, look for good value for the price they pay on consumer goods, and rebalance to their desired AA when needed.
(Put me in the "positive" column for these items.)

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Re: Herd mentality

Post by shuresm7b1 » Wed Sep 13, 2017 11:56 am

onthecusp wrote:
Wed Sep 13, 2017 11:31 am
Back in the late 90s there were many articles espousing that people should buy what they know. Like coffee from that new chain? Buy Starbucks. Like your computer? Buy Apple or Microsoft. Like Old Navy clothes? Buy Gap stores. Like that big box store? Buy Best Buy. I think your neighbors joined that herd.

It all worked great until it didn't, but then it was someone else's fault. The tech bust hit everyone in 2000, the housing bubble hit everyone in 2008. "My instincts were just fine" and "I've made great money except when everything is blowing up." are self evidently correct statements but ignore the fact that the strategy did NOT work.
Sure some companies like Sears may never come back. But when everything blows up the indexes seem to go that way also. Having an asset allocation that addresses all of these risks is of course the key.
Last edited by shuresm7b1 on Wed Sep 13, 2017 11:59 am, edited 1 time in total.

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Re: Herd mentality

Post by shuresm7b1 » Wed Sep 13, 2017 11:57 am

meowcat wrote:
Wed Sep 13, 2017 11:33 am
shuresm7b1 wrote:
Wed Sep 13, 2017 10:16 am
You're right I actually have no idea how they are really doing but they have a nice house and lots of bravado. You never know who your neighbors really are until you know.
This is very important. You said it yourself, you just don't know. Many, many folks just like them (or appears to be like them) are struggling with insurmountable debt and sweating over their desk each night wondering how they're going to pay their bills. It could all be smoke and mirrors and their house of cards could come tumbling down at any time. Or not. The point is, you just don't know.
Exactly. I love watching the show American Greed because it shows me how much smoke and mirrors there can be. A certain extremely successful person can be more broke than you or I.

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Re: Herd mentality

Post by midareff » Wed Sep 13, 2017 12:08 pm

shuresm7b1 wrote:
Wed Sep 13, 2017 10:01 am
I was visiting with neighbors last night having a glass of wine and some nice conversation at which point the topic of investing in money came up. It might have even been me that brought it up I don't remember, but it became a very pleasant conversation with my neighbors and they had me questioning my reasons for certain ways of investing.

I mentioned that I was reading security analysis books and trying to learn a bit more about fundamentals and they mentioned that their way of investing is more That of buying popular stocks like Apple, Google, and Johnson & Johnson which are stocks with dividends but also popular stocks that have less dividends and more growth. They seem to treat it more like gambling than actual investing but they seem to be having some level of success with this gambling. I call it gambling because they really didn't seem to know any of the fundamental characteristics about the companies other than maybe a P/E.


Now these are older people in their 80s living very nice lives and they've been around the block a few times and we're very intelligent people with strong backgrounds so I was quite curious to know what is the success rate for herd mentality investing where people are not looking at the fundamentals or not really understanding much more about where the market is at.

I mentioned all of these crashes from 1929 on up but they insisted after those crashes the market keeps going up. It always goes up. I really didn't know how to respond to this because I mean the Dow is at its all-time high so I guess overtime it does. What am I missing here? To eliminate risk as much as possible surely it's critical to understand a lot about the things you're invested in? No?
It's just like going to the horse races. After the fact they always tell you about the winners, never the losers. Warren Buffet just had his hedge fund guy pay up the million bucks early since he knew that he wasn't coming from down 22% on the S&P to a winner in the remaining three months. So you are lucky (LOL) to have friends who are so much smarter than the hedge fund gurus.

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Re: Herd mentality

Post by Fallible » Wed Sep 13, 2017 12:09 pm

shuresm7b1 wrote:
Wed Sep 13, 2017 10:01 am
...
I mentioned all of these crashes from 1929 on up but they insisted after those crashes the market keeps going up. It always goes up. I really didn't know how to respond to this because I mean the Dow is at its all-time high so I guess overtime it does. What am I missing here? To eliminate risk as much as possible surely it's critical to understand a lot about the things you're invested in? No?
It seems what you may be missing here is knowledge of market history and what is included in setting an asset allocation. You mention reading security analysis books; what else have you read? Any books by Boglehead pros?
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shuresm7b1
Posts: 49
Joined: Mon Aug 08, 2016 5:28 am

Re: Herd mentality

Post by shuresm7b1 » Wed Sep 13, 2017 12:11 pm

midareff wrote:
Wed Sep 13, 2017 12:08 pm
shuresm7b1 wrote:
Wed Sep 13, 2017 10:01 am
I was visiting with neighbors last night having a glass of wine and some nice conversation at which point the topic of investing in money came up. It might have even been me that brought it up I don't remember, but it became a very pleasant conversation with my neighbors and they had me questioning my reasons for certain ways of investing.

I mentioned that I was reading security analysis books and trying to learn a bit more about fundamentals and they mentioned that their way of investing is more That of buying popular stocks like Apple, Google, and Johnson & Johnson which are stocks with dividends but also popular stocks that have less dividends and more growth. They seem to treat it more like gambling than actual investing but they seem to be having some level of success with this gambling. I call it gambling because they really didn't seem to know any of the fundamental characteristics about the companies other than maybe a P/E.


Now these are older people in their 80s living very nice lives and they've been around the block a few times and we're very intelligent people with strong backgrounds so I was quite curious to know what is the success rate for herd mentality investing where people are not looking at the fundamentals or not really understanding much more about where the market is at.

I mentioned all of these crashes from 1929 on up but they insisted after those crashes the market keeps going up. It always goes up. I really didn't know how to respond to this because I mean the Dow is at its all-time high so I guess overtime it does. What am I missing here? To eliminate risk as much as possible surely it's critical to understand a lot about the things you're invested in? No?
It's just like going to the horse races. After the fact they always tell you about the winners, never the losers. Warren Buffet just had his hedge fund guy pay up the million bucks early since he knew that he wasn't coming from down 22% on the S&P to a winner in the remaining three months. So you are lucky (LOL) to have friends who are so much smarter than the hedge fund gurus.
was this a bet that Warren Buffett made and lost?

shuresm7b1
Posts: 49
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Re: Herd mentality

Post by shuresm7b1 » Wed Sep 13, 2017 12:12 pm

Fallible wrote:
Wed Sep 13, 2017 12:09 pm
shuresm7b1 wrote:
Wed Sep 13, 2017 10:01 am
...
I mentioned all of these crashes from 1929 on up but they insisted after those crashes the market keeps going up. It always goes up. I really didn't know how to respond to this because I mean the Dow is at its all-time high so I guess overtime it does. What am I missing here? To eliminate risk as much as possible surely it's critical to understand a lot about the things you're invested in? No?
It seems what you may be missing here is knowledge of market history and what is included in setting an asset allocation. You mention reading security analysis books; what else have you read? Any books by Boglehead pros?
Yeah I've read an awful lot of boglehead and otherbooks but a simple example like Sears or Enron brings it home that no matter how much people think they know about individual stocks they don't. The DOW does seem to keep going up over long term but not for all stocks.
Last edited by shuresm7b1 on Wed Sep 13, 2017 12:36 pm, edited 1 time in total.

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midareff
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Re: Herd mentality

Post by midareff » Wed Sep 13, 2017 12:16 pm

shuresm7b1 wrote:
Wed Sep 13, 2017 12:11 pm
midareff wrote:
Wed Sep 13, 2017 12:08 pm
shuresm7b1 wrote:
Wed Sep 13, 2017 10:01 am
I was visiting with neighbors last night having a glass of wine and some nice conversation at which point the topic of investing in money came up. It might have even been me that brought it up I don't remember, but it became a very pleasant conversation with my neighbors and they had me questioning my reasons for certain ways of investing.

I mentioned that I was reading security analysis books and trying to learn a bit more about fundamentals and they mentioned that their way of investing is more That of buying popular stocks like Apple, Google, and Johnson & Johnson which are stocks with dividends but also popular stocks that have less dividends and more growth. They seem to treat it more like gambling than actual investing but they seem to be having some level of success with this gambling. I call it gambling because they really didn't seem to know any of the fundamental characteristics about the companies other than maybe a P/E.


Now these are older people in their 80s living very nice lives and they've been around the block a few times and we're very intelligent people with strong backgrounds so I was quite curious to know what is the success rate for herd mentality investing where people are not looking at the fundamentals or not really understanding much more about where the market is at.

I mentioned all of these crashes from 1929 on up but they insisted after those crashes the market keeps going up. It always goes up. I really didn't know how to respond to this because I mean the Dow is at its all-time high so I guess overtime it does. What am I missing here? To eliminate risk as much as possible surely it's critical to understand a lot about the things you're invested in? No?
It's just like going to the horse races. After the fact they always tell you about the winners, never the losers. Warren Buffet just had his hedge fund guy pay up the million bucks early since he knew that he wasn't coming from down 22% on the S&P to a winner in the remaining three months. So you are lucky (LOL) to have friends who are so much smarter than the hedge fund gurus.
was this a bet that Warren Buffett made and lost?
Buffet made and WON! The hedge fund guru pays $1M to Buffet's designated charity.

NotWhoYouThink
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Joined: Fri Dec 26, 2014 4:19 pm

Re: Herd mentality

Post by NotWhoYouThink » Wed Sep 13, 2017 12:17 pm

It sounds like the neighbors are showing their age. Decades ago when they learned to invest there weren't any low cost index funds, and buying and selling had transaction fees that seem absurd now. So you picked "good" companies that all your friends were also picking, and you held on. And mostly it worked. There are better ways to manage risk now, but in their day their method was a good one.

Some of us (not me of course, maybe you) get stuck with music from a particular era, or clothing and hair styles. The same can happen with investment plans. One of the jobs of boards like this is to vet some of the new products coming out so I can decide whether there is something else I should be trying.

ResearchMed
Posts: 4972
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Re: Herd mentality

Post by ResearchMed » Wed Sep 13, 2017 12:18 pm

shuresm7b1 wrote:
Wed Sep 13, 2017 12:11 pm
midareff wrote:
Wed Sep 13, 2017 12:08 pm
shuresm7b1 wrote:
Wed Sep 13, 2017 10:01 am
I was visiting with neighbors last night having a glass of wine and some nice conversation at which point the topic of investing in money came up. It might have even been me that brought it up I don't remember, but it became a very pleasant conversation with my neighbors and they had me questioning my reasons for certain ways of investing.

I mentioned that I was reading security analysis books and trying to learn a bit more about fundamentals and they mentioned that their way of investing is more That of buying popular stocks like Apple, Google, and Johnson & Johnson which are stocks with dividends but also popular stocks that have less dividends and more growth. They seem to treat it more like gambling than actual investing but they seem to be having some level of success with this gambling. I call it gambling because they really didn't seem to know any of the fundamental characteristics about the companies other than maybe a P/E.


Now these are older people in their 80s living very nice lives and they've been around the block a few times and we're very intelligent people with strong backgrounds so I was quite curious to know what is the success rate for herd mentality investing where people are not looking at the fundamentals or not really understanding much more about where the market is at.

I mentioned all of these crashes from 1929 on up but they insisted after those crashes the market keeps going up. It always goes up. I really didn't know how to respond to this because I mean the Dow is at its all-time high so I guess overtime it does. What am I missing here? To eliminate risk as much as possible surely it's critical to understand a lot about the things you're invested in? No?
It's just like going to the horse races. After the fact they always tell you about the winners, never the losers. Warren Buffet just had his hedge fund guy pay up the million bucks early since he knew that he wasn't coming from down 22% on the S&P to a winner in the remaining three months. So you are lucky (LOL) to have friends who are so much smarter than the hedge fund gurus.
was this a bet that Warren Buffett made and lost?
Nope.
A decade ago, he bet that the S&P would beat a specific hedge fund.
The S&P has won (or by a large enough percentage with a very short time remaining); the hedge fund guru lost.

RM
This signature is a placebo. You are in the control group.

MI_bogle
Posts: 240
Joined: Mon Aug 01, 2016 3:56 pm

Re: Herd mentality

Post by MI_bogle » Wed Sep 13, 2017 12:38 pm

livesoft wrote:
Wed Sep 13, 2017 10:39 am
I have had a few of these conversations. I mostly see that folks don't actually know how other strategies performed compared to their own strategy or what their advisor did for them. It was not unusual to hear someone say, "My stocks were up 10% last year" when in fact the S&P 500 was up 15%.
I hear this quite a bit from friends, family, and acquaintances. Of course, not as much as variants of "the stock market is rigged" and "401ks are like gambling" and other such nonsense.

In any case, I am always tempted to ask people how their performance measured compared to their benchmark, but I learned pretty quickly that it's better to just say "hey, that's awesome, congrats!" and move on to other topics

shuresm7b1
Posts: 49
Joined: Mon Aug 08, 2016 5:28 am

Re: Herd mentality

Post by shuresm7b1 » Wed Sep 13, 2017 12:51 pm

NotWhoYouThink wrote:
Wed Sep 13, 2017 12:17 pm
It sounds like the neighbors are showing their age. Decades ago when they learned to invest there weren't any low cost index funds, and buying and selling had transaction fees that seem absurd now. So you picked "good" companies that all your friends were also picking, and you held on. And mostly it worked. There are better ways to manage risk now, but in their day their method was a good one.

Some of us (not me of course, maybe you) get stuck with music from a particular era, or clothing and hair styles. The same can happen with investment plans. One of the jobs of boards like this is to vet some of the new products coming out so I can decide whether there is something else I should be trying.
Yep it makes sense to me

Fallible
Posts: 6061
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Re: Herd mentality

Post by Fallible » Wed Sep 13, 2017 1:42 pm

MI_bogle wrote:
Wed Sep 13, 2017 12:38 pm
livesoft wrote:
Wed Sep 13, 2017 10:39 am
I have had a few of these conversations. I mostly see that folks don't actually know how other strategies performed compared to their own strategy or what their advisor did for them. It was not unusual to hear someone say, "My stocks were up 10% last year" when in fact the S&P 500 was up 15%.
I hear this quite a bit from friends, family, and acquaintances. Of course, not as much as variants of "the stock market is rigged" and "401ks are like gambling" and other such nonsense.

In any case, I am always tempted to ask people how their performance measured compared to their benchmark, but I learned pretty quickly that it's better to just say "hey, that's awesome, congrats!" and move on to other topics
And I'm tempted to ask them to show their statements proving their winning claims, but I never would. It's mainly social conversation among friends and acquaintances, always interesting but rarely to be taken seriously.
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