How comfortable is it really to be a sheep?

Wednesday, 11th April 2018 14:16 - by Ranjeet Singh

I just came back from the Isle of Man yesterday with the kids and as any parent will know, the one thing that kids love more than anything (perhaps with the exception of chocolate) are animals. So, there I was sitting next to my girls in Tapnell Farm watching them bottle feed baby lambs (very cute) and it got me thinking.

It got me thinking about the differences between us and animals; about how as humans we have evolved over the years to run the planet whilst animals have for the most part stayed largely the same. I’m no biologist but I would imagine with my limited knowledge of science that a sheep today probably looks pretty similar to a sheep 10,000 years ago. Feel free to correct me if I’m wrong.

And then I thought about trading and investing. You see whilst the human race is undoubtedly the one race that has grown and evolved exponentially leaving other life forms way behind in its track, there are still many characteristics of humans which we seem to find very hard to shake off.

For example, take a moment to consider the phrase ‘safety in numbers’. It’s something that we hear about a lot and I am sure on a Saturday night out in a dodgy part of town, it probably has a lot of use. But when it comes to investing I can’t think of anything worse.

That’s because most investors lose money most of the time. They probably don’t realise this because a) they only look at returns over the long period of time and b) they don’t consider the benchmark index.

You see I don’t think that you can use the benchmark of any stock market index as a way to artificially inflate your performance. It’s like building a car and then having somebody push it for you. The car that you build should move on its own, not because it has ten men pushing it or because it happens to be sitting on the top of a hill.

What I mean by this is that just because the stock market goes up by 10% we shouldn’t all be taking our clothes off and dancing in the street in celebration when our share portfolio goes up by the same. What did we even do to achieve that return? Nothing.

It’s the same argument that I would use for so called ‘property developers’ who have made a fortune in property when really all that they have done is buy a house and let the housing market take care of the rest. That’s not investing. If you build or renovate a house which in turn increases the value of the house by more than the amount of time and money that you spent on the project, then that is what I call an investment. You made something out of nothing.

It’s the same with the stock market. If you can beat the stock market then you should applaud yourself because ultimately that should always be your goal. If your intention from the start was only ever to match the market then building a share portfolio of any kind is a futile exercise. Surely it would be easier, quicker, and cheaper just to buy an index rate tracker? Why would you even bother with buying individual shares or funds if all that you wanted to do was to get a return from that portfolio that is in line with the market?

And that’s where the animal thing comes in to play and in particular sheep. As I sat there watching my kids feed those beautiful little animals I realised that humans were no different to these animals.

You see when it comes to investing humans don’t seem to have evolved at all. We are like sheep. We buy together, make money together and when the market eventually crashes we lose together.

The analogy of being part of a flock of sheep that fall off the edge of the cliff is a very true picture of how 95% of investors are when it comes to investing. Just the fact that you have read the number ‘95%’ is probably releasing chemicals into your brain at this very moment which would associate it with being a good thing. It’s completely out of our control.

Did you know that everything that we see is actually upside down but now are eyes have convinced us into thinking that it’s the right way up? You see our brain plays tricks on us all of the time. Our brain is now trained to believe that 95% is a good thing – it gives certainty in an uncertain world. And that protects us, it keeps us safe, it ensures our survival.

And that’s all great but the issue is that when it comes to trading and investing the only thing certain is that when the market falls 95% of people lose money. That’s why 95% is a bad thing – and it’s why being contrarian is so important.

Of course, it’s not easy to be different which is why only 5% of people do it. It’s a lonely place. Ask somebody at school who is bullied for looking different, talking differently, acting differently. From a young age we all want to be a part of a group, we all want to belong to something. When we are older that wanting to belong to something doesn’t go away.

Last night I watched my beloved Liverpool FC smash through Manchester City to get into this year’s semi-finals of the Champions League. I like belonging to a group of fans who feel the same as I do about that football club. You see whilst we have evolved our internal instincts remain very raw – fight or flight.

Inherently it is hard to fight tens of thousands of years of DNA that has programmed us into thinking that our survival is based on following others, being part of the pack and in a group. Whilst this may have been true ten thousand years ago when we were out hunting in groups for wild animals the same is not true today, at least not when it comes to investing.

The reason that this is so pertinent today is because the market is on a knife edge and could easily fall. If you are one of the two people (!) who read my posts you will know that recently I have been stating that the market is overdue for a correction.

And if you already suspect that you are a sheep and all that you can see ahead of you, behind you and on either side of you, are more sheep then you are trusting your life savings to whoever is at the front of your flock. That’s not a good strategy because the only difference between you and the guy in front of you is that he falls over the cliff just a second before you do. You still both end up falling.

There is however another way, a better way. It’s the way that 5% of the rest of the investor population invests. It’s how the ‘professionals’ invest. It’s how Goldman Sachs and other big institutions invest. It’s still not too late to make your move before you reach the edge of that cliff.

Watch today’s short video at https://youtu.be/-xe5xAzgh7Y

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.