What are lemmings? For those who remember the video game from long ago, or better yet, the Gary Larson cartoon, lemmings are cute, furry, little rodents that appear to have a care free attitude as they go through life. All appears well until they en masse plunge over a cliff and into the sea; yes, this is a widely held misconception, but it offers a great visualization that will help me drive home this blog’s point. That point being how to avoid a mob mentality and make better decisions.
It is my belief that most investors suffer from “Lemming” decision making. Just like the mythical lemmings who plunge over the cliff and into the abyss, investors are often caught up in mass hysteria and act before thinking. You’d think that with all of the historical evidence out there, investors would be more cautious about taking a leap of faith on the latest and greatest investment idea. Sadly though, that is not the case and that age old say rings true “Those who fail to learn from the mistakes of their predecessors are destined to repeat them.”1
This raises the question “Why don’t investors learn from the past?” Let’s go back before we go forward. When I am talking about past events, I am thinking of the following big deal events:
- The Great Tulip Crisis
- Long Term Capital Management
- Enron
- Collateralized Debt Obligations
- Madoff
- Bitcoin
My list is not intended to be exhaustive, its intent is to highlight specific events where investors relied on hope as a strategy. And as people who have been close to me over the past 8+ years know, I am always saying that “hope is not a strategy.”
Just like the mythical lemmings who rush head long over the cliff, most investors seem to have their heads buried in the sand and only pull them out when there is movement in the market. It is a human nature thing, the fear of missing out on something. Investors in particular fear on missing out on the next big thing; their hope is that it is a sure thing.
I could spend pages on breaking down each instance but then this would not be a blog, it would be a research paper. So, let’s look at the last item on my list, Bitcoin. Here you have an idea from an unknown inventor, or inventors, that is supposed to enable easier cross border settlements. The concept and the technology beneath the covers (Blockchain) are great. In theory Bitcoin was supposed to be a vehicle for trade where people would not have to rely on middle men to make trades happen, and eliminate those same middle men from taking their cuts. But what ended up happening was a feeding frenzy where people thought that the Bitcoin crypto currency had somehow magically overnight become this rare and valuable asset. This frenzy caused the price of a single coin to soar to almost $20,0002.
Investors seeing this meteoric rise in Bitcoin’s value started panicking, fearing that they would miss out on the best investment ever. You heard stories of people putting second mortgages on their homes so that they could buy Bitcoin. How is that rational or prudent? In the end, for now, the price has plummeted to the $6,000 range and those who jumped in at the peak are left holding coins that are not worth the money they invested and most likely trying to figure out what they are going to do.
It seems that those investors could have benefited from a more thoughtful decision-making approach. An approach that Coegil is looking to introduce with its product. Helping people make the best decisions possible is what we are striving for so that maybe we can prevent history from repeating.
1– George Santayana: The Life of Reason: The Phases of Human Progress (1905-1906) Vol. I, Reason in Common Sense
2- http://fortune.com/2017/12/17/bitcoin-record-high-short-of-20000/
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