Herd behavior

"People behave very peculiarly in terms of their reactions, because they're human beings — they get excited when others get excited, they get greedy when others get greedy, they get fearful when others get fearful."

People behave very peculiarly in terms of their reactions, because they're human beings — they get excited when others get excited, they get greedy when others get greedy, they get fearful when others get fearful.

Buying because everyone else is buying, or selling because everyone else is selling, is a decision made by the crowd - not by your own analysis.

Following the crowd is an ancient instinct: for most of human history, staying with the group improved your odds of survival. In markets, this instinct produces bubbles - the price of a stock or an entire sector keeps rising faster and faster not because the businesses are really worth more, but because more and more people buy simply because the price is rising, afraid of missing out on an easy gain.

The same instinct works in reverse during crashes: when everyone is selling in a panic, selling feels like the prudent choice, even if nothing in the fundamentals of the business you own has changed. In both cases the crowd moves together, and the price drifts away from what the business is actually worth.

The antidote is having a thesis written down before you buy - what you expect from the business, and at what price the risk/reward changes. A thesis written in advance, while you're still level-headed, is the anchor that keeps you out of the herd both on the way up and on the way down.