Investing tends to seek excessive peer validation. There is a strong reason behind this. We constantly worry about whether we are doing the right thing. How do we check on that?
The easy option is to compare. So, we compare with friends. This explains why what others are doing interests us more than what we must be doing. But peers could often be doing the wrong thing. Especially when markets behave to the diktats of herd mentality. The chances of everybody being in the wrong rise when herd mentality is everywhere.
For instance, take the present scenario. After a sharp fall towards March and April, markets experienced a sharp rally. Most investors went into the March crash with already weak and losing portfolios. Initially, they did not participate in the crash. Then, as the markets started to rally, people found that they had the time to trade.
People seem to have a lot of time to trade while working from home. This trend gained momentum as others began trading in large numbers. Then the FOMO factor took over. The fear of missing out is working on the retail crowd who are trying their hand at trading. But this is a grave risk to take given the economic headwinds. When investors must be focusing on risk mitigation, the herd is chasing near term returns.
This is akin to zebras grazing too close to where a lion is awaiting its prey. The time available for the zebras to move away is uncertain. Straying closer and closer to the lion endangers them. For now, the zebras seem too hungry to notice anything.
