The 52-Week Low Formula: A Contrarian Strategy that Lowers Risk, Beats the Market, and Overcomes Human Emotion

Chapter 2Herding and the Bandwagon Effect

If you want to achieve above average outcomes you must be willing to take an unconventional approach. If your approach is conventional and commonly used then you guarantee average results.

—Howard Marks, The Most Important Thing: Uncommon Sense for the Thoughtful Investor

Jacobian Inverse: I would prefer to invest alongside the masses to ensure I achieve average results. It feels comfortable, as there is safety in numbers. I realize there is no use to thinking differently than the investing public, as it is much easier emotionally to be one of many versus one of few. We will all win and lose together.

The feeling that there’s safety in numbers goes back to our most primal, instinctive roots. Early man found safety in tribes—literally, safety from predators, famine, and deprivation. And this instinct has carried through time, changes in behavior, and cultures. As a species, we have developed from primitive bands of hunters and gatherers to modern tech-forward explorers of worlds both real and virtual. Still, we have not evolved beyond the herd mentality. If we see an empty restaurant during the dinner rush, we assume there’s something wrong with it. If we see people flocking to another, our instincts tell us it must be good.

There’s ease in herding—emotional, behavioral, cognitive, and otherwise. It’s System 1 thinking. We have an instinct to belong, something described by behavioral scientists as the Bandwagon Effect, a term first ...