General Stock Course

The Market Herd

The market herd is another way to describe the overall individual market participants, the mass market or the market sentiment who have most control the day to day movements of the market.

Market herd becomes an inherent mentality which is closely tied to mass psychology which is created by each individual investor participant; it is human nature to fall into flawed individual
inherent belief systems. Individual mentality can become distorted by having the perception that it is safe to agree with popular opinions on situations and allowing your own individual emotion to override rational decision making. Popular beliefs evolves into the markets general sentiment on a particular situation.

This attribute is relatable to human emotions of fear, panic, greed, euphoria which will cause company or market booms and busts. It is important for the individual investor to not think like
the herd, yet instead think for themselves and stick to the facts about what they know. It is important to not to be scared to have a contrary position to the herd. This is how the greatest opportunities present themselves in the market; by spotting bargains when no one else is noticing them.

  1. The herd is another way to describe the mass market, overall market participants, the general market sentiment, sheep mentality,
  2. The herd instinct causes inefficiency (mispricing) in pricing at times, which is opportunity for the intelligent investor to buy low when others are panicking and sell when others become greedy.
  3. The herd mentality are responsible for the cause of market bubbles due to copying and sticking to popular opinions and beliefs instead of using rational behaviour. For example the dotcom bubble, the tulip bubble
  4. Investment professionals are aware of this how irrational markets usually occur and have learnt how to profit off taking a contrarian positive and sticking to their own beliefs through knowing the facts.
  5. The individual investor must think for themselves and not be sucked into what the general market is doing, it may seem safer and the right decision. But often the market gets it wrong. will cause irrationality and emotional decision making which is dangerous in investment.
  6. The herd will control the price movements on a daily, monthly and yearly basis as they are the majority of investors in the overall market.
  7. The herd is the cause of Mr Markets rapid swings in mood fueled by their own emotional decision making