When in doubt, follow. This is an apt quote on the behaviour of us humans.
We generally draw comfort in going with the majority, or the consensus.
The problem is that we have very less control on such behaviour, as evolution has equipped us with this tendency of running a rat race.
Yes, you read that right. We are all running several rat races, whether in our work lives or when it comes to investing our money.
A rat race?
Wikipedia defines a rat race as…
“…an endless, self-defeating or pointless pursuit. It conjures up the image of the futile efforts of a lab rat trying to escape while running around a maze or in a wheel.
The rat race is a term often used to describe work, particularly excessive work; in general terms, if one works too much, one is in the rat race. This terminology contains implications that many people see work as a seemingly endless pursuit with little reward or purpose.”
So, there is little reward or purpose in running a rat race, but then our brain doesn’t understand any other way.
We are programmed to feel that the consensus view must be the correct one. This mistaken belief that ‘not everyone can be wrong’ has led to many a disastrous decision.
Rat race and investing
The financial world is a place where the rat race has been more pronounced and researched than any other field. Since it involves money, people generally hate taking chances. And thus they are more likely to be a part of a rat race…one that is led by the experts, the stock market gurus.
The Great Depression of 1920-30s in the US, the dotcom boom of 1999-2000, and the more recent financial crisis are the most famous examples of how investors have lost big time by doing what everyone else was doing – by running a rat race without knowing what they were trying to achieve.
Across all these major crises, investors who were initially skeptical ended up buying into the hype under the mistaken belief that not everyone could be wrong. And yet, most people were wrong.
Simply because the chief problem with a rat race is that even if you win, you are still a rat.
How to protect getting into a rat race?
It’s difficult, to be very frank!
Not doing like what others are doing is akin to challenging our basic fabric of survival.
But if you know how to do that when the time and situation demands – like in the heady days of a bull market – you can do yourself and your money a world of good.
One way you can save yourself from running a rat race while investing your money is by building your own independent investing process that is non-emotional, rational and involves high level of discipline.
Clearly write down your reasons for buying a stock and spell out all the possible reasons that will make you sell it (or hold it), whatever the crowd suggests.
While all this is easier said than done, with competitive edge (of the right kind of investing wisdom and awareness about the behavioral pitfalls), you can succeed as an investor in the long term, even if the crowd doesn’t want you to!
You just need a dose of discipline, patience, and self-confidence.
As I just said, we humans are prone to running several rat races. But if you can recognize what others are doing and examine it rationally, you will be less likely to follow the stampede when it’s headed in an unprofitable direction.
After all, if you want to make more money than other people, you can’t invest like other people.
In simple words, you can’t be running a rat race.
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