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Following the Crowd is Safe?

A classic rant from 2011. Always ask why the crowd is going in a direction, before following. Following the crowd financially can be an expensive mistake.

Safety is Relative

So you think following the crowd is safe, because you are with others?

Ask a lemming if following the crowd is a good idea.Better still ask a cow in line at the slaughterhouse. Everyone else is going in this direction, it isn’t safe?

As you can tell I have been on a Risk management course. I am now full of pithy comments about risk and such. Just because everyone else is doing something, you must at least ask yourself if this is the right thing for you. This is true when it comes to your money.

Many folks who were badly singed in 2008 with stocks are looking for safer places to put their money. They think Putting Money in Bonds is Safe (or at least in Bond Mutual Funds, or Bond Indexes). Normally bonds are safe(r), but there is a perfect storm right now that makes this less safe.

Everyone in the day thought Nortel was rock solid and safe. One misguided financial media maven Garth Turner was still sending misguided investors back into the killing fields of Nortel even as the stock imploded. I remember people saying, “If Nortel goes down, Canada is going to be in a bad way“, or “The Government won’t let that happen“. It did happen, the majority of the herd were wrong again here too.

The experts are saying commodities and Gold are a safe place to hide against wars and all the calamities of today. I don’t understand these markets enough to feel safe in them, so I am staying out of them. Living in Canada I am effectively already feeling the benefits of commodities and gasoline. The Canadian economy was continuing to grow thanks to Oil and Commodities, maybe I should hedge some other ways to take this into consideration?

For a non-financial example look at the proliferation of tattoos in younger folks, is this the right decision? I have no idea, but my “not following the crowd” comment to my kids is, get into Dermatology, because in 20 years all those butterflies are going to be condors, and their owners are going to want to have them removed (oh and all those folks getting multiples piercings are going to want them filled in too).

The Herd is Right Sometimes

Most of the time, most of the people make mostly correct decisions. This does not mean there should be a blind following on your part, especially when your money is involved. You must ask questions about why your money should be where it is. Why it should go where folks think it should go, and don’t follow simply because everyone else is doing it.

Remember what your mother used to say, “If everyone jumped off the bridge would you follow them?”, kind of like what I did with Nortel.

Feel Free to Comment

  1. Both choices have their dangers too. With stocks, even though in theory there may be no cap, there is a bottom. Stocks can drop in value and turn wretched. With bonds, there is rate of interest risk, rising price risk and credit risk. Credit entry risk is the risk that the bond issuer will be ineffective in order to make its payments on time or at all, efficaciously defaulting on the bonds. The Canadian stock market, just like any others, does rely on the aggregate wisdom of crowds. We can all point to spectacular failures, but on the whole our system keeps chugging along because most people are right most of the time.

  2. Bret @ Hope to Prosper


    I worked for a network device startup during the dotcom crash. There was an executive from Nortel in our office evaluating our product. When the news came out about the massive layoffs, he had to phone the corporate office to see if he still had a job.

    Crazy times.


  3. Following the crowd might make us feel “safe” but it isn’t always the right answer.

    Bonds, we probably all agree, feel more “safe” than stocks and equities but in the long-run, they are losers to inflation when comparied to equities. For some reason folks feel “safer” with bonds when in reality they are actually losing out.

    One thing about experts: when it comes to predicting the future, any expert guess is almost as good as anyone else.

  4. And now GT preaches the Cdn real estate market is going to burst. Any day now! (for the last decade) He who speaks loudest is not necessarily the most correct.

    This being said, people are still herding toward real estate it seems!

    I wonder what field takes care of those quarter sized earrings I see guys sporting these days. That’s a good field to get into. Back in the day I had my ears pierced – pierced! – not gouged. Tiny pin holes which could naturally fill in.

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