Conformity and Herd Behaviour: Are You Following the Crowd?

The following video clip from the National Geographic TV Show, Brain Games, illustrates how random behavior can become a social norm because of our human tendency to conform.

Conformity is a social influence where the desire to fit in with a group leads a person to change his or her beliefs or behavior. It leads people to think or act in a certain way without establishing the reason why beforehand.

The girl in the video had no rational basis for why she kept standing up at the sound of the beep. She was just going along with the crowd. She saw everyone else doing it and figured they must know something she didn’t, so she followed along.

It is important to take note of how she described her decision to stand up: “Once I decided to go with it, I felt much more comfortable.” She made a decision based on her unconscious desire to conform to the group, and then that decision, together with the example of the crowd, provided reinforcement, and made her feel like it was the right thing to do.

The meaningless behaviour became so ingrained that she was able to influence other unsuspecting people around her. She transferred her random, irrational behavior to the newer members of the group, who also felt a need to fit in.

What Does Conformity Have to Do With Investing?

In the field of investing, there’s a dynamic known as “herd behavior.” It’s a mindset characterized by the lack of individual or analytical decision-making. People think and make investing decisions based on what they see or hear about what other people are doing. Quite simply, they unconsciously conform.

I wonder how many first-time investors have bought an expensive property with very little due diligence after hearing a friend at a party talk about a home he or she recently purchased. Conformity, or herd behaviour, leads people to think, “Hey, what’s wrong with me? I don’t own an investment property. I better buy something or I’ll get left behind!”

Even after questioning the numbers, and fretting over whether it’s really a smart thing to do, the herd mentality thinks, “This many people can’t be wrong.” As a member of “the herd,” they gravitate to the same or similar investments as the crowd, simply because many others are also buying those assets or using that strategy.

Is it possible that similar forces have subconsciously shaped the way you think and act as an investor? Have you been unknowingly influenced by the investing crowd?

John Templeton was one of the wealthiest investors of all time and gave away over $1 billion to charitable causes throughout his life. He had a knack for creating wealth by ignoring conventional wisdom. He made $86 million shorting NASDAQ stocks before the March 2000 crash. When everyone was bullish and buying, he foresaw the carnage that was to come.

Here’s some investing wisdom from Templeton: “If you want to have a better performance than the crowd, you must do things differently from the crowd.”

I still recall one of the first lessons I ever learned from Steve McKnight, “Success comes from doing things differently.”

Are you following the property investing crowd? If you said “yes,” and if you want to have a better performance than the crowd, then it’s time to change course. The most successful investors ignore what’s commonly considered to be conventional wisdom, and instead chart a different course.

The most successful investors do not conform.

Three Signs You’re Following the Property Investing Crowd

If you had trouble answering the question above, here are three signs you could be following the investing crowd:

1. You Just Leveraged-Up to 80 Percent LVR or Higher to Buy a Capital City Rental Property, Speculating on Future Capital Growth.

Australians are some of the most indebted people in the world. In fact, the Bank for International Settlements just released its latest global update on household debt and guess who’s at the top of the list? You got it; it’s the Great Southland.

Of the 44 countries surveyed, Australia has the highest ratio of household debt to GDP in the world, at 125 percent. That makes us one of just four countries where households owe more than one year’s worth of their total economic production.

Of course, we have our love affair with real estate to blame for this. The vast majority of the increase in Australia’s household debt over the last few years has been driven by growth in home prices. How do we know? Back in 2012, our household debt level was at about 110 percent of GDP, and that was still relatively high. Since then, real estate around Sydney and Melbourne is up about 40 percent.

The jury’s still out on what the outcome will be of these high-debt levels. The current pace of growth is certainly unsustainable. Keep your fingers crossed that our regulators can orchestrate a measured slowdown.

If you want to follow the crowd, borrow big to buy an expensive property with a low rental yield. Then hang on tight and hope for the best.

2. Most or All of Your Investment Properties are Negatively Geared.

According to the 2012-13 taxation statistics released by the ATO, of the nearly 1.9 million landlords in Australia, 1.26 million of them recorded a loss on their rental income. This adds up to two-thirds of all property investors losing money each and every month by holding onto real estate. If you want to follow the crowd, try negative gearing.

If you’d like to learn more about negative gearing, you can read an extensive article I wrote here. In a nutshell, it’s a strategy where property investors purposefully incur a cash flow loss in order to write off that loss against their personal income.

The crowd believes the ultimate benefit will come through the capital growth of the property. Negative gearing is simply speculation that the future capital gain on the asset will eventually amount to more than the annual income loss, which can be justified in the mean time through the tax benefit.

The Australian economy has been steadily growing for 25 straight hears without a recession. Having never experienced tough economic times, many Aussie investors believe real estate only goes up in value. This makes them easy targets for the salespeople who promote this risky negative gearing strategy.

Investors who negatively gear are completely at the mercy of the market. This is gambling, not investing. Just like at the casino, sometimes investors win with negative gearing, and sometimes they lose big. It just so happens the casino has been very generous the last few years.

3. You’ve Spent Little on Education, and Instead Take Advice From Other Investors Who’ve Followed Numbers 1 and 2, Above.

If you want to follow the crowd, just rush out and buy something in fear of missing out, or getting “locked out” of the market. If you believe all real estate always goes up in value, there’s little reason not to be indiscriminate and haphazard. There’s no need to educate yourself; just find out what your friends have done and copy them.

Many of the people I’ve mentored in our Property Apprenticeship program have said to me, “I wish I would have done this course before buying my last deal.”

The inference here is that there are some key things they learned that would have prevented them from making the mistakes they now regret. It’s way too common that these same people now need to unwind some of their past deals in order to free up the capital and borrowing power to move toward their goals.

It’s far better to get some training before you step out to start investing. One of the things we do in our course is help investors lay down a strong foundation made from smart planning and goal setting. Once in place, we then build on that foundation by teaching people how to find, analyse and buy properties through a solid, proven due diligence system.

That way, rather than conforming to the crowd, or mindlessly following another’s opinion, you buy with confidence, confident the deal will deliver your desired outcome.

Educate yourself, but make sure your educators don’t have an ulterior motive. There are a lot of training programs out there that will try to steer you toward buying certain types of properties, ones that bring a kick-back to your “educators.”

Knowing that this is an industry rife with exploitation, we have set Steve McKnight’s Property Apprenticeship apart from most other courses in three different ways:

1. We offer many testimonials from investors just like you who are using Steve’s techniques in the real world to get results.
2. We have mapped the course as a Certificate IV in Business to prove the depth and quality of the training material.
3. We offer a 100 percent money back guarantee.

To learn more about Steve McKnight’s Property Apprenticeship course, watch this brief video from Steve and then check out some of the testimonials from our graduates.

By Jason Staggers

Jason was a personal mentor working with Steve McKnight's Property Apprentices. He helped hundreds of investors apply Steve's teachings in the real world and achieve greater results on their journey to financial freedom. Jason now lives in Perth, WA where he leads Neuma Church.