How often have you seen a massive amount of people wanting to buy a stock when it has already surged sharply higher? Just think about it, there were so many people buying stocks like Tesla Inc (NASDAQ:TSLA) when it was trading near the $200.00 a share level. Hardly anyone was even talking about the stock when it was trading around $35.00 a share in March 2013. It is still amazing that people want to buy stocks when the institutional money is ready to sell them; that is what happened with Tesla stock. Perhaps you remember how many people in the public were going crazy about buying Apple Inc (NASDAQ:AAPL) at $700.00 a share. We all know how AAPL dropped like a rock soon after that euphoric $700.00 level.
Below I’m going to list three reasons why you should not follow the crowd:
1. When everyone is looking at the same thing, the party is usually over. In 2005, I remember being at a local church carnival in NYC. While people were going on rides and lining up to buy food and beverages, the largest amount of people that gathered together was around a real estate booth. I still remember the real estate agent yelling at the top of her lungs, “real estate will never go down again!” When I heard that statement a light bulb went off in my mind, that must be the peak in the housing market. This church carnival occurred in August 2005. As we all know, the home builder stocks topped out right at that time.
2. You can use the sentiment of the crowd to your advantage as well. In late 2011, nobody wanted to own a home. People (the crowd) were lining up to be renters by the thousands. Everyone wanted to rent an apartment and home ownership became somewhat taboo and even shunned by the public. Once again, I’m at the local mall and I see a booth setup in the middle of the shopping mall. The booth had a sign that said hot property rentals. People were lining up by the hundreds to get information about property rentals. Every talking head in the media was mentioning about how bad the housing market is. At that time, I told my wife that it might be time to look for a house. Sure enough, the property that we live in has already doubled in price from our purchase. You can now see how the crowd swings like a pendulum. They go from one extreme to another extreme. Unfortunately, the crowd is almost always wrong. The moral of this article is to do the opposite of the crowd; when you can spot extreme euphoria and despair, that is the time to act.