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The next phenomenon is known as herding. Evolution has equipped humans with a tendency to herd, or stick with the majority. Presumably, this would have served us well in days gone by, but in the world of investing, it can be very treacherous.

Following the crowd has always made people comfortable, and being the odd one out leaves most feeling uneasy. We are programmed to feel that the consensus view must be the correct one and this mistaken belief that not everyone can be wrong has led to many a disastrous decision. Following the crowd can cause investors to follow various fashionable investments simply because others are doing so.

The dot.com boom of 1999/2000 is an excellent example if this, where many investors who were initially sceptical ended up buying into the hype under the mistaken belief that not everyone could be wrong. And yet, most people were wrong.

On a final note, it is preferable to be in the minority and not blindly following the crowd. Bear in mind that more people fail in the market than succeed, as is the case with many endeavours (sport for example). Unfortunately, excellence is the exception rather than the rule and we should aspire to be unique and not just part of the herd. And remember that the consensus view isn’t necessarily the right view.

Profile: Warren Buffett

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