I sometimes get lost when I'm driving. This mostly occurs when I decide to take the back streets or hopeful shortcuts in the effort to reduce travel times and/or miss traffic. Now at these times, when trapped in a seemingly never ending sequence of ringed suburban streets and no through roads, I implement a simple plan. Follow the car ahead of me. Chances are that this car is headed in the direction I'm headed in right? – or hopefully at least out of this labyrinth concocted in some evil town planner's basement. Sure sometimes I end up pulling into some stranger's driveway, but most of the time the plan does work and I search my way to a more familiar road or highway. Maybe I should get a Navman, or check my google map app on my phone. The avoidance of seeking directions does tend to be phenomenon afflicting humans of the male variety.
Continuing the traffic theme briefly, another phenomenon that I see afflicting both male and female drivers quite often, is what I like to call "long queue, wrong queue". This is where a driver pulling up to a red light on a multilane road behind a host of cars, will decide to follow the majority by picking the lane with the most cars in it (usually the middle lane). Even though there may be a lane vacant or with less cars in it, this person perhaps feels that following what everyone else is doing will be best. Now, imagine you are in a supermarket and heading to checkout, and you see 3 registers open. You will look at the 3 respective queues and try and work out which one will move fastest – and most people will choose the queue they think will get them out fastest. This decision can be pretty quick and easy if, for example, one register has no customers being served, or if one register has less people in the queue. Wouldn't it be funny to see 4 or 5 customers line up at the one register with another register right next to it open and not being used. Well that's what we get with the "long queue, wrong queue" phenomenon on the roads.
Analogy time… Understanding the psychology behind this phenomenon can help us to somewhat appreciate the struggle and mechanics behind market volatility and investor decision making – with the overall question being, when is it best to follow, and when is it best to not.
So why do drivers choose the long queue? Well one would suppose it would be because they are unsure about the other lane(s) in some way and so choose the lane that others have chosen (hence assuming that other drivers know what they are doing and have chosen the best lane). But what could they be unsure about? Maybe that lane ends soon, or maybe the cars in front can see a car broken down ahead in another lane. Whatever, the case the decision to follow is generally due to uncertainty – safety in numbers.
This is the same for investment markets as well. In times of uncertainty, it is much easier and "safer" to follow the car ahead – wait for everyone else to start investing and then start yourself. The problem is that you will end up waiting in the line for much longer and waste time and money. For investments you will miss buying them low and end up buying high.
There are cars that avoid the long queues and choose the other lane(s). Locals especially, or those brash enough to choose the least popular lane, will often be able to bypass traffic and maybe an extra change of traffic signal, and thus get to their destination a little quicker. For investors, opportunity to take advantage of undervalued securities/markets will be easily scooped up by those with "local" knowledge or those brave enough to act.
So generally, following the crowd will lead to missed opportunities and slower growth. So when is it good to follow? I started by saying that I follow cars when I get lost, which tends to work. Most drivers follow map books or what their Navman tells them to do with success. So following can lead to greener pastures. But who do you follow? With investing there are no perfectly reliable maps books, or fund managers who always know the way. There is inherently greater risk in being a follower when it comes to investments.
"Long queue, wrong queue" syndrome is upon us and in full swing. Staying ahead of the game, and finding the fast lanes in this environment of uncertainty can provide greater growth and higher acceleration. Listen to 2GB to get regular traffic updates and be aware of traffic conditions further up the road. And when lost, follow the guys who probably know what they are doing, and they will hopefully get you back to the safety of the well travelled path, from where you can start planning the rest of the journey home.
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