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Fatal: information overload and the herd instinct

Monday 27 June 2016

Most investors are victims of information overload and the  herd instinct. There is only one way to deal with this:  Deal with the current affairs in your own way.


Investors understandably look for explanations why some of them are successful and many unfortunately are not. An entire industry of consultants, authors, journalists, organisers and "pseudo-gurus”  make their living by showing the way to succeed when it comes to money and increasing your capital. Investors who are paid subscribers to these gurus try to emulate their idols and make pilgrimages like lambs to the slaughter, but in this case, they attend seminars and conferences.

 

Beyond clever free riding

 

Others spend days at investor fairs. A particular species of interested parties increasingly sit for hours at their laptop to reverently listen to popular "webinars". All this in an effort to get free some tips and "snap up" investment ideas. They eagerly wait to finally get that magic key to investment success. A fatal mixture of hero worship and lack of thought "Beyond clever free riding."

 

In the stock market, this has always been an old phenomenon. One thing is for sure: In this way, amateurs never evolve from their state of helplessness. The late Hungarian stockbroker Andre Kostolany repeatedly said, before the Second World War: "Nowhere in the world will you find more fools in one square meter than on the trading floor."

 

Correctly interpreting the spirit of the time

 

The starting point for long-term investment success lies in an entirely different area. It is not about financial mathematics,

analysis of price trends or "banking jargon". These are all just smoke bombs. Surprising as it may sound, for me it is clear: The name of the game, is how you handle the era and the circumstances in the time in which the investor lives.

 

This is not as easy as it sounds. The investor has to live in the, here and now, which fate has put him in. Whether he likes it or not. Whether he feels the conditions are favourable or difficult. It does not matter.  If one clings to a mental escape of the "good old days" and wears blinkers it will not  lead to financial success.

 

The investor must be fully aware and get totally involved with life and track and monitor all its facets. Being grumpy and angry about what goes on does nothing. Instead, it is better to look at current affairs with open eyes. To develop a sense of what is really going on in the world. Experienced investors develop a secure feeling for real trends and developments.

 

Victims of manipulation

 

And now we come to the crucial point, the actual challenge. After all, who is in the middle of this action and now trades, while running the risk current events will affect the portfolio and to also be blinded by the media tide. Although he says that he sees things correctly, in reality he is

swept away by the media avalanche. And imperceptibly absorbs part of the herd instinct, influenced by the prevailing mood.

 

Here lies the greatest danger for the investors. The herd instinct in financial markets does not happen by chance. The mood of  masses are the result of deliberate action by influential market participants. An alliance of influential power brokers and media manipulation. Again and again one can observe how renowned, globally active financial institutions surprise investors at critical market phases with extreme forecasts.

 

For this purpose there is a long series of examples from top financial services worldwide. "The price of oil will drop below 20 dollars and will never rise to years " - " The shares are too expensive and the prices will plummet by 30 percent."  From my own experience I can only say the following - all alarms from major banks have almost always had one thing in common: The exact  opposite will happen.

 

A dumping ground for individual investors

 

Years ago, a close friend of mine who was an investor put it quite simply: "Some major bank  has always targeted their pool of  individual investors as a dumping ground for their own industrial and investment banking interests."

 

He illustrated a number "beautiful examples"  which I can unfortunately, for legal reasons, not quote here. I have in particular a lot of respect for investors on the New York Stock Exchange.  I was lucky that an "old hand" and wealthy investor drummed the following  into me early on: "Just watch, [and follow] the best seller in the world sitting in Wall Street". The accuracy of this statement was shown by losses suffered by some German savings banks in  2008 and 2009.