(Article for the Jakarta Globe – 29 October 2012 issue)
MONEY WISEFOLLOW THE HERD AT YOUR PERILIn financial planning and business in general we can be our own worst enemies.
We are too often driven by emotion and the fear of being ‘left behind’. Thisapplies in many different fields. Let’s look at some of them.
Stock markets
Investing in the stock markets should be for the long term. Buying when there is aboom then selling in panic when prices fall is a recipe for disaster. Yet this is whatmany people do. When everyone was buying into technology stocks in the late
90’s Warren Buffet, one of the world’s shrewdest investors and still one of therichest men in the world, was investing in unexciting things like paint. When themarkets crashed in March 2000 his investments held up. He knew it was best not
to follow the herd.
No-one wants to be left out of a success story. Similarly, no-one wants to beassociated with failure. The result is that people tend to buy when the popularityof a product or asset drives prices high and sell when they fall. Throughout thehistory of mutual funds, sales have been lowest when markets are down andhighest when markets are booming. But to make money, investors should bedoing the opposite! The problem is we instinctively follow the herd.
A more recent example was the public offering of Facebook shares. When theshares were launched on 18 May they were priced at $38. Now they stand at justaround half that figure. Investors rushed in on reports that the share could rise
50% within days. Instead, those who haven’t jumped ship have lost 50%. What isinteresting is how the herd was running in one direction up to the IPO and how itquickly turned tail and rushed the other way at the first hint that things were notgoing to plan.
One way to remove the human element is to commit to investing gradually andregularly through all market conditions via a regular savings plan. You thenbenefit from ‘cost averaging’, which means that you buy more units or shares
when prices are low and fewer when they are high. Over the long term thisstrategy pays dividends – provided that you sell only when prices are higher thanthey were during most of the time the plan has been running.
Property
Owning a property is likely to be on everyone’s wish list. If you find a property you
like and it is affordable nothing should deter you. But if you are tempted tospeculate because it appears there is a ‘gold rush’ in a segment of the market it
could end up in tears. The worst example in recent years was the rush to buy
homes in the US thanks to the availability of easy financing. The loans were basedon an assumption that prices would continue to escalate. As we all know, theydidn’t. Instead home values went into a free fall that sparked the banking crisisand financial meltdown of 2008. Those who came off worst were the tens ofthousands of homeowners who were forced out of their properties. The banks
lost heavily too but they were rewarded with generous bailouts so they could
make the same mistakes again!
Going into business
Anyone who has spent years working as an employee will dream from time totime of ‘being free’ and owning his or her own business. But as anyone who hasmade the transition will testify, it is not always plain sailing. In selecting a business
it is only too tempting to look at successful existing businesses and hope to beequally successful by joining those already in the sector. The chances are that
others will be entering too for the same reason. By the time they are all set up,
there are too many in the field!
Even big business makes the same mistakes. If you have been to Bali recently you
cannot have failed to notice the huge number of hotels springing up. New threestar hotels are offering rooms at under $30 a night. Great for consumers but are
they going to be commercially viable for the investors? Time will tell but my guessis that the oversupply is going to hurt the industry. We can see the same
happening with airlines.

To be a successful entrepreneur you need a degree of vision and an ability toinnovate rather than follow.
So which way should you go?
The best answer perhaps is to keep an eye on the front of the herd, as its earlier
moves may indicate good opportunities, but when the movement becomes astampede keep away as it usually ends in a river or the bottom of a cliff! In thissituation, ignore the herd and stick to your own carefully planned strategy.
Colin Bloodworth, director of PPI Indonesia, has spent over 20 years inIndonesia. If you have any questions on this or a related subject you can contact
the writer at indonesia@ppi-advisory.com