All this while, we have been talking about investment strategies and working on what to do and what not to do. Investment in stock is because of investors, and investors must protect them from their enemy because investors' enemy is investments' enemy. And the only biggest enemy of the investor that can clash with all the hard work is emotions.

Let's talk about something that is not good for investors and is the enemy.

🔶 Herding Effect

In terms of the financial sector, the herding effect refers to the phenomenon where people join groups and follow the actions of others without further analysis.

In other words, these are the groups of people who have the ability to think independently and heavily rely on others.

The dot-com bubble of the late 1990s is a great example.

Herding mentality:

Humans are a type of animal that is prone to a herd mentality. We always follow what others are doing, even though we know we shouldn’t.

Example: In an examination, everyone uses a blue pen, but you are using a black pen. Due to the herding effect, you will also use a blue pen, even though the exam states you can write an exam with a blue/black pen.

The same goes with investing: Imagine you come across a stock and, with research, you get to know it is not good to buy. Later, the stock price shoots up for several days and months, and everyone talks about how good the company is and how far the stock will go, and even analysts raise their estimated target price with research data.

Until then, you will wonder, "Do I miss something?" Am I wrong?

So with the herding effect, you press the buy button at an extremely high price with a super high valuation because of FOMO and profitable investment, and when the correction comes, the stock price returns to its valuation, and you lose your conviction, and then you decide to sell and lose your money.

Herding effects normally happen with FOMO (fear of missing out) in a profitable investment idea. As this type of behavior is totally instinctual, those who don’t surrender to it often feel distressed and fearful. Consequently, bad investment decisions are made.

So what are the true reasons for the herding effect, and how can we avoid it?

The herding effect happens because of our own emotions. Don’t let your emotions control our decisions.

“We are controlled by our emotions when making decisions.”

To avoid and escape the herding effect, practice independent thinking.

“Don’t fear being singled out for going the opposite way.”

Believe in yourself and improve your self-awareness when making investment decisions so as not to become the victim of the herding effect.

🔶 Control the uncontrollable factors 

Some people never succeed in investing because of emotions, and they are in a rush to get returns and try to control the market factors.

“Wealth needs time to accumulate.”

“Never try to control the uncontrollable factors.”

Investing in the financial market is the best way to build wealth over time.

This is what most failed investors do:

• Indulging in useless information and noises.

• Envy by looking at others who are making quick money.

• Cloning other stock ideas.

• Predicting the future of the market, stocks, prices, and economy.

• Fearing and having FOMO.

• Regretting past mistakes.

• Avoiding mistakes while investing.

• Denying reality when it's harsh.
  

And after all of this, they invest in companies with little or no research or stock valuation.

Make sure, as a value investor, you always have self-awareness of the emotions you are experiencing and try to bring them back to the same side. Emotions are part of humans, but we don’t make decisions in finance based on them.

Forcing rational thinking itself is not a rational decision.

Nobody is perfect in terms of investing, but if you’re able to minimize your time with uncontrollable factors, you’re one step closer to success in investing.

Conclusion:

Don’t focus on uncontrollable factors; master your emotions by practicing independent thinking.

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