There are many ways and means to become a successful investor. One way is to be aware that certain behavioural flaws exist in human beings - like 'herd mentality' - and avoid them.
It is logical to expect that a group of people can become successful investors by taking better investment decisions. Why? As more information gets shared and different view points and experiences get discussed and assimilated, the process of deciding which stocks are good 'buys' and which stocks are 'duds' become easier.
The large number of investment groups on the Internet, some with several thousand members, point to the popularity of such joint investment decision making. So the members of these investment groups should be rolling in money, right?
The reality is otherwise. Some times group decision making can be flawed, specially if enough research, or an opposing view, is not taken into consideration. A few individuals, regarded as knowledgeable by group members, can mislead the group inadvertently.
A good example is the mad rush to buy infrastructure and real estate stocks in the later stages of the bull market in 2007. Many investors entered these stocks when they had risen way past the prices that discounted huge growth expectations well into the future.
'Land banks' was added to the investment vocabulary, just as 'eyeballs' were added during the dot.com boom at the turn of the century and 'replacement costs' were touted for pushing overpriced stocks during the Harshad Mehta scam in the early 1990s.
Even seasoned fund managers are not immune to such 'herd mentality' - and the price is paid by legions of small investors. The plethora of 'infrastructure funds' launched in 2006-07 are mostly languishing while the BSE Sensex has gained more than 100% in the past 9 months.
A quick look at the top holdings of popular diversified equity funds is equally revealing about the 'herd mentality' that leads to poor investment performance:-
- HDFC Top 200 - SBI, ICICI Bank, Infosys, ONGC, L and T
- DSPBR Top 100 - TCS, L and T, SBI, Reliance, ITC
- Sundaram Select Focus - SBI, ICICI Bank, Reliance, Sterlite, Shree Renuka Sugars
- HSBC Equity - SBI, Infosys, Reliance, ITC, BHEL.
Investors buying into these four funds may think that risk has been mitigated through diversification. But they have actually invested in the same stocks (with one or two exceptions).
Herd mentality is further compounded by bad timing. Money is literally poured into fund houses when the BSE Sensex is at or near a top, and pulled out by cart loads when the index is languishing near the bottom.
One of the tricks to being a successful investor is to avoid the herd mentality. Particularly when the herd is talking about esoteric investment ideas like alternative energy and water management. Stick to the knitting - invest in what you know and understand.
SOURCES : EMAIL
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