The dangers of investing by following the crowds
In many situations, being part of the crowd can be rewarding.crowd group individual motivation fish win contest race diffferent
Outdoor festivals, markets, concerts, stage shows: these are all events that are considerably better when enjoyed with the buzz and energy of a large crowd.
There are also situations where you should be wary of a crowd – and investing in property is one of them.
When you get caught up in the hype and follow the crowd, parking your hard-earned dollars where others are investing, the fact is you are playing a very risky game.
Why is crowd-following dangerous?
It can be oh-so-tempting to follow in the hotspotting footsteps of others, who you believe have done all of the research and due diligence for you.
However, this strategy is fraught with danger.
In simple terms, I liken it to crossing a road with no crosswalk.
If you dart out across gaps in traffic on your own, you feel very vulnerable.
But if you step out at the same time as someone else, you feel slightly safer.
You may perceive that your risk has changed; that you are somehow less vulnerable to a negative outcome.
“Surely they wouldn’t step out into traffic if they felt it was dangerous,” you may think.
However, here’s the problem:
Your level of risk hasn’t changed.
You may perceive that you have ‘safety in numbers’ but the truth is, stepping out into traffic is just as risky, whether you do it alone or with someone else.
It’s only when you use your own wits to make a decision that you are truly minimising your risk.
When doing something as simple as crossing the road, that means looking both ways, observing the traffic flow, listening for wayward or speedy vehicles and ascertaining an appropriate gap in traffic before stepping out.
The same principle applies with investing.
Just because another investor – or a crowd of investors – is flocking to a particular suburb, town or development, that doesn’t necessarily mean it’s safe or suitable for you to invest there, too.
You can’t assume that just because plenty of people are doing it, the research and due diligence has been done.
Getting caught up in the hype
While successful investors have a plan and follow a strategy, I do appreciate how seductive property investing can be to beginning investors.
The slick marketing campaigns, the beautiful new or renovated properties, the quick calculations and promises of incredible returns: these can combine to create a very pretty picture of what your future wealth could look like.
Some people call this hype, others call it excitement.
When I see investors getting caught up in a hotspot, I call it contagion, because their disappointing decisions have the ability to contaminate their entire portfolio with bad deals.
There is a documented flow of emotions that investors tend to experience during property cycles; you may recognise one or two of these.
During a bull market, when a particular area is gaining popularity, it starts with optimism.
This progressively gives way to excitement, as the suburb/location gains popularity with potential buyers and traction in the media.
By this stage, the region is likely to be experiencing some growth.
Official figures show spikes in property sales – both volume and value – and investors are clamouring to get a piece of the action.
Bidding wars ensue.
Properties are listed for only a couple of weeks, if not days, before being snapped up.
If you’re in the bidding, you experience the thrill of chasing these most sought-after commodities and if you actually secure a piece of the pie, it may give way to euphoria,as the actions of the thousands of similar frenzied investors push the property’s value ever higher.
Unfortunately, it’s usually at this point – with the crowd fully active and on board – that the market becomes overvalued.
A rush of energy and activity has lit up the market for a short period, but now, it only takes a small piece of negative news to tip the market down.
When the bear market then begins (and it always does), investors initially see it as a short-term setback.
This anxiety quickly gives way to fear as investors start to question whether the area is experiencing a minor blip or a major correction.
When the dust settles and the market returns to a more realistic value, investors surrender to the situation, with many becoming despondent, even selling their investments.
It is at this point – when there is maximum crowd pessimism – that savvy investors strike.
By now the crowd has moved on.
What’s more, many investors have sold their properties on the cheap, providing new buyers with the best opportunity for returns.
Investing takes guts, not glory
Your best chance of success is tied to your ability to do the opposite of what the crowds are doing – that is, holding when everyone else is buying, and buying when everyone else is selling.
When you buy at the market’s lowest point, it usually only takes a small measure of good news for the market to improve.
Be warned: buying at this stage takes a lot of guts.
You will often be going against every media headline you read, and friends and colleagues may tell you you’re crazy.
It feels uncomfortable, but ask the most accomplished landlords you know, and they’ll tell you it’s true: successful investing requires going against the crowd.
Remember Warren Buffet’s great saying: “Be fearful when others are greedy and be greedy when others are fearful.”
Latest posts by Michael Yardney (see all)
- 10 Common mistakes investors make during a property downturn - March 29, 2019
- How much do you need in super to retire comfortably? - February 25, 2019
- The dangers of investing by following the crowds - January 28, 2019