Think Like the Great Investors: Make Better Decisions and Raise Your Investing to a New Level

Part II

In the avalanche

No snowflake in an avalanche ever feels responsible.

Voltaire

People will act differently when they are in a crowd to the way they behave when they are on their own. We must understand crowd behaviour, lest we become one of its victims. The most powerful method for us to counter the power of the crowd over us is to develop the art of contrary thinking. This consists of learning to be a sceptic and to question every belief before accepting it on face value, especially when it seems that everyone believes it is true and sees no other possibility.

Chapter 23

Mob rule (crowds)

One of the more important insights that all the great investors have about the markets is that they represent the behaviour of people. Once this is appreciated, it becomes easier to understand why the prices of stocks (or other financial instruments) are not always what we would expect from a logical examination of the available information. Instead, the information about stocks is filtered by the hopes, fears, greed and ego of investors.

Investors do not act in a vacuum, however. They exist in a community and are subject to many influences as they interact with other investors or with experts, advisers, fund managers and others. Thus, in addition to studying individuals in isolation to understand how investors make decisions, we need to understand how the dynamics of groups also ...