In investing, popular moves will not yield extraordinary outcomes

Pratik Oswal

Warren Buffett’s timeless advice, “What the wise do in the beginning, fools do in the end,” rings especially true today in the world of investing. At a time when many are racing to invest in small and mid-cap stocks, it’s vital to step back and think: Is following the crowd the best strategy?

Forecasting the future of stocks isn’t simple. John Kenneth Galbraith said it best: “We have two classes of forecasters: Those who don’t know -- and those who don’t know they don’t know.” Unfortunately, most investors tend to fall in the second camp, and as a result use crowd based behaviour to decide how to navigate the stock market and investing. Following the crowd generally works well in deciding which restaurant to eat at, or what brand of toilet paper to buy (via reviews and stars) but this rarely works in investing. So as an investor, what should one do for extraordinary success?

But first, why doesn’t it work? The stock market today consists of hundreds and thousands of smart investors who are in the game of delivering extraordinary returns. They harvest past data and predict future movements. The stock markets hence tend to be very forward looking and any forecasts you make which are similar to the market consensus do not lead to extraordinary outcome. In short, if you follow most of the crowd, your outcomes will be average.

To outperform the market average, you can’t just be as right as everyone else. You have to be a step ahead. So how does one achieve extraordinary outcomes in investing?

1. Be Early and Patient: One proven way is to spot a potential winner early on and hold onto it patiently. It’s like planting a seed and waiting for it to grow into a tree. The returns might not be immediate, but with time and patience, the rewards can be significant.

2. Correct non-consensus forecasts: The other route is to make accurate non-consensus forecasts. This means predicting market moves or stocks or trends that others haven’t seen yet or predictions that most disagree with. These predictions are hard to make and even harder to act on. But when they’re right, they can lead to big rewards.

Just to clarify, following-the-crowd-based investing is in no way harmful for the investor. If an investor is looking to make good returns (not extraordinary), it can be a good way to make long-term decisions.

When is following the crowd bad for investors?

When herd investing becomes FoMO (fear of missing out) based investing, that’s what investors should strongly stay away from. If you believe you are missing out on something - the best thing is to stay away. (Eg. crypto in 2021).

In conclusion, as the buzz around small and mid-cap stocks grows, remember to think independently. Following the herd doesn’t always lead to the extraordinary results. Instead, a mix of strategy, patience, and sometimes, a touch of boldness is the real recipe for success in investing.