A lesson learned: “Following the crowd works until it doesn’t”

Last month, The Wall Street Journal’s Heard On The Street lead story was about the fallout of the Robinhood market mania from the summer of 2020. The headline says it all: “Robinhood Investors Robbed Themselves – The Party Is Over And It Was Predictable.”

“Stoking FOMO, the fear of missing out,” Robinhood’s “crowd-following” behavior apparently helped Robinhood’s mostly young investors — “and then it hurt them.”

Basically a lot of Robinhood’s novice stock traders thought they were investing when actually they were gambling. Everyone was buying Robinhood’s “Top Movers” until they weren’t. That’s when the bottom fell out.

The good news? Most didn’t lose much because they didn’t have a lot to put into the game. And possibly they learned a very important lesson for investing and for life – just because everyone is doing something doesn’t mean it’s the right thing for everyone to do. Having a strategy matters. Sometimes “missing out” is better.

In his Smart About Money column on the GameStop run-up, Canton Co-operative Bank President & CEO Nick Maffeo talked about understanding and minimizing the risks of stock speculation. “Exciting can get dangerous in a bunch of different ways,” he said. “Slow and steady sounds dull to some, but that is actually how most people do successfully grow their investments over time.”

 

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