Curse of the Lemmings -

Why Investors Shouldn’t Just ‘Follow the Crowd’

In this article, we look at contrarian investing and how to overcome herd mentality when investing. The availability of tracker funds or ETF marketed at low cost by brokers have made it increasingly easy and simple to follow the crowd. But is it still paying off to go the extra mile and beyond the majority sentiment?

Whenever you find yourself on the side of the majority, it is time to reform (or pause and reflect). ― Mark Twain

Modern democracies are underscored by the majority rules principle. In modern elections, 51% determines the leader of a country (unless we’re talking about the US, where electoral college allocation trumps popular vote, no pun intended). From a Western perspective, in many cases, the majority rule of democracy is logical, wielding power from the consent of the governed and allowing many voices to be heard.

However, in investing, following the majority is not necessarily beneficial. In fact, investment typically begins with the minority, in which a few early investors make great returns and the majority of investors follow suit and replicate, though with lower returns. Majority-rule in an investment does not bode well for its future, often indicating that the trend has reached its peak, with nowhere else to go but down. For purposes of this article, we use the term consensus investors for those who follow the majority and contrarian investors as those who run from the majority to form the minority.

Sometimes it is hard to jump off the bandwagon, as things can look really good and safe from that point of view. But most trends are, by definition, fleeting. As the saying goes, all good things must come to an end. As such, consensus investors look only at the short-term gains and losses, not preparing for a long-term investment.

“Buy when there's blood in the streets, even if the blood is your own”

Though he may have lived in the 18th century, Baron Rothschild’s above quote remains relevant for the contrarian investing position. But what exactly is contrarian investing?

Contrarian investing is similar to value investing (see our insight on value investing) in the search for misplaced and undervalued stocks in the market. While a traditional value investor typically relies on tangible assets and examines fundamentals such as P/E and book values, a contrarian investor also looks at subjective factors, such as sentiment in media, undervaluing or overvaluing indicators. However, these subjective factors can be objective too, as there are technical indicators and automations to identify tops and bottoms of trends.¹

Like their value investing cousins, contrarians emphasise context. It is crucial to look to the causes behind market fluctuations. Why has a stock price dropped drastically? Was the drop justified? Contrarian investing reads between the lines of fluctuation, determining the roots of trends. Of course, this means contrarians take considerably longer in making investment decisions.² Contrarians see lows and highs for what they are: extreme. Cursory market fluctuations that produce extremely high returns are not good investment opportunities.

Another distinction is the contrarian reliance on human behavior. Contrarian strategy is based on human fear and aversion to risk. They turn away from herd mentality and interrogate the cognitive biases of the bandwagon effect. From this point of departure, contrarian investing fosters discipline, patience, and confidence (sometimes blindly so), turning away from the crowd and suppressing basic aversions to risk. It is also not for most everyday investors as it requires active engagement.³

A fair warning: contrarian investing is not for the faint of heart. You have to be in it for the long haul, dedicated to taking risks and being the brunt of jokes from those who think you may be crazy for selling soaring stocks and buying failing stocks.

We can use Howard Mark’s Second-Level Thinking Matrix to visually conceptualise the differences between consensus and contrarian investment strategies:

Image: Howard Mark's Second-Level Thinking as applied to consensus/contrarian investing.

The case against following the crowd

In the world of increasing technological disruption, are democratic and consensus decisions becoming more dangerous? At Altio, we believe that you shouldn’t follow the crowd when investing. We take it a step further, as we think that consensus is actually anti-Darwinian and can create mental shortcuts that result in crisis. Like lemmings, the anti-Darwinian cognitive bias to follow the crowd in investing can be fatal.⁴ In a disruptive ecosystem, we think there are three arguments against consensus investing: familiarity bias, noisy markets, and volatility.

Familiarity Bias

A good rule of thumb: if it’s obvious, it’s too late.

Human behaviour is key to understanding stock market fluctuations, as you cannot separate investing from the people conducting the investment. People invest in what they know and that which they’ve successfully invested in previously. Would you rather invest in Apple or Vuzix? Both are tech companies with similar annual return rates, but only one is a household name. Though we equate safety with familiarity, that is not always the case when it comes to investing.⁵ This is especially true in regards to increasing technological disruption. The familiarity bias and market disruption are at complete odds with one another. By definition, disruption involves reconsidering the status quo, and, therefore, reconsidering the relevance of familiar names. In sticking with well-known names, one misses out on opportunities to invest in up-and-coming stocks that are shaking up the ecosystem.

Noisy market

Let’s face it, markets are noisy, and we aren’t just talking about trading floors. Noise, as used by Fischer Black, is incalculable and arbitrary “information that hasn’t arrived yet.”⁶ Disruption creates an incredibly noisy market as it makes it difficult to determine the root of trends or fluctuations. With so much noise in the market, how do you listen for the right investment opportunity?

Though rampant, speculation doesn’t make it any easier to understand noisy markets. Let’s use the current high IPO bubble as an example. As both DoorDash and Airbnb entered the public market in December 2020, their valuations were through the roof, making headlines and encouraging noisy trading.⁷ These are emerging companies on the market, the shiny new toys that garner overhyped attention. However, these speculative stocks will soon fade into the crowd, replaced by newer, shinier stocks as sentiment changes. In this way, noisy markets in a disruptive ecosystem make it difficult to invest with confidence alongside the majority.

Volatility is Exhausting

Earlier we said that being a contrarian took a lot of time and effort, but, in reality, so does being a consensus investor. Following the ups and downs of a volatile market is exhausting. Disruptors emerging across the market make it increasingly difficult to chase these ever-changing trends. You need a full-time job dedicated to keeping up with trends and altering portfolios accordingly, especially for staying up to date with the rollercoaster that is 2020. Blindly following a volatile market is like getting onto a rollercoaster without strapping in first. A contrarian gets on the same rollercoaster, but listens to safety instructions and straps themself in. Both have the same objective to have fun (i.e. make money) and both are subject to the same twists and turns of the ride, but one was prepared and the other fell off.


As Benjamin Graham said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”⁸ In this analogy, the short-term market (consensus investing) is a democratic, majority-rule process driven by emotion and sentiment, while the long-term market (contrarian/value investing) is rational and observable. If you want to be an investor for a day, then go for it, follow the trend. But if you want to have a profitable and sustainable income from investing, maybe consider incorporating some of these contrarian ideas into your own strategy.

We know that contrarian investing isn’t for everyone, but we do think it offers valuable insights into smart investing. Plus, if everyone became a contrarian then we’d become the majority (the horror!). Regardless of what you want to call your investing strategy, common sense and expertise should always prevail above majority-rule. So go ahead and be a devil’s advocate, root for the losing team, support the underdog -- it pays off.


¹ Josef Lakonishok, Andrei Shleifer, and Robert W. Vishny, 1994. “Contrarian Investment, Extrapolation, and Risk,” The Journal of Finance 49(5).

² Maureen Morrin, Jacob Jacoby, Gita Venkataramani Johar, Xin He, Alfred Kuss, and David Mazursky, 2002. “Taking Stock of Stockbrokers: Exploring Momentum versus Contrarian Investor Strategies and Profiles.” Journal of Consumer Research 29(2).

³ Rupal Bhansali, 2019. Non-Consensus Investing: Being Right When Everyone Else is Wrong. New York: Columbia University Press.

⁴ Fun Fact: This lemming behaviour is actually a myth, but is continued to be used as a metaphor for crowd-followers

⁵ ValueWalk 2018.

⁶ Fischer Black, 1986. “Noise,” The Journal of Finance 41(3), 529.

⁷ Hunter Walk 2020. “How to Grade this week’s Airbnb and DoorDash IPOs.”

⁸ Benjamin Graham and David Dodd, 1934, Security Analysis.