[Summary]
Herd mentality is the tendency to want to do the same things as many other people.
What makes us more likely to fail due to herd mentality is not the lack of knowledge itself, but the fact that we end up justifying hasty decisions afterwards.
When it comes to actual investing, we start by calmly looking at trading volume and the intensity of social media. However, we cannot overlook the fact that it is easy for people to join late after becoming popular.
In this article, we will organize crowd psychology not as "knowledge" but as a step to check before buying or selling. Don't rush to conclusions, read according to your financial amount and time horizon.
First, divide based on herd mentality.
When looking at crowd psychology, first determine what you want to judge. The information you need will change depending on whether you want to know the meaning, confirm before buying or selling, or review your current holdings.
Especially for beginners in investing, the easier the words are, the more they tend to take them as a conclusion. Crowd psychology alone is not a factor in making decisions. If you want to check it, it is more realistic to look at it in conjunction with fund management, holding period, and opposing materials.
Scenes where it is easy to fail due to herd mentality
If we look at herd mentality as a failure pattern, we first need to make narrow assumptions. It is important not to mix up whether you are talking about the market as a whole, individual stocks, NISA or long-term funds.
Checking the following points will make things a lot easier.
| Axis to check | What to see in terms of crowd psychology |
|---|---|
| purpose | What do you use to judge? |
| Time axis | Which is closer to short-term trading, long-term holding, or NISA? |
| basis | Which one is more important: price, business performance, interest rates, exchange rates, or psychology? |
| risk | When things go the other way, where should you look again? |
| action | Will it lead to buying, selling, or doing nothing? |
Points that can easily cause trouble in making decisions
Herd mentality doesn't only stumble when you lack knowledge. In fact, there are situations where we interpret something conveniently because we know a little bit about it.
- Don't decide to buy or sell the moment you see the crowd psychology.
- Don't mix up your own holding period with the time frame that fits the herd mentality.
- Don't increase your position to recoup your losses
- Don't make a decision just based on SNS or rankings.
The important thing here is not to settle on a single correct answer based solely on herd psychology. In investment, the meaning of the same material changes depending on the market, holding period, and amount of funds. When in doubt, prioritize confirmation over conclusion.
Checklist before buying and selling
Before using crowd psychology as a basis for making decisions, check at least these five things.
- Can you explain in one sentence the purpose of looking at crowd psychology?
- Have you confirmed one or more countermeasures or failure conditions?
- Are you investing your living funds or money that will be used soon?
- Have you decided in advance the criteria for cutting losses, taking profits, and continuing to hold stocks?
- Are you making judgments based only on social media or short headlines?
Checklists are simple, but they prevent you from adding reasons after making a decision. The purpose of checking crowd psychology is not to speed up action, but to reduce unnecessary errors in judgment.
Summary
Herd psychology is a material for organizing investment decisions. Even if you read it as a failure pattern, treating it as a standalone buy/sell signal will lead to poor judgment.
The points to keep in mind are as follows.
- Decide first the purpose of looking at crowd psychology
- Do not mix time axis and amount of funds
- Check not only good materials but also negative materials
- When using NISA and long-term funds, consider how to handle losses
- When in doubt, reduce your position or postpone it.
The more knowledge you have, the safer it seems, but in the market it can become dangerous if you use it incorrectly. It is realistic to treat crowd psychology as a tool to pause before buying or selling, rather than as a word that forces you to make a hasty decision.