What is Lemming
A lemming refers to the act of an investor following the crowd into an investment, without doing research themselves; this usually results in losses. These investors are emotional and easily swayed by short-term market performance. This "herd" mentality can increase the chance of losing money, because investors either leave the market too early or get into it too late, when prices are already too high to make a profit.
BREAKING DOWN Lemming
In the animal kingdom, a lemming is a rodent known for periodic mass migrations that occasionally end in drowning. To contradict the "herd" mentality, many proactive investors react in an opposite fashion than what the majority of investors are doing. For example, if investors are in a buying frenzy, anti-"herd" investors will sell and when the crowd sells, these investors will go against the lemmings by buying stocks, instead.
The antidote to becoming a lemming investor is to keep emotions separate from trading judgment. Instead, concentrate on spotting lemming activity and consider exploiting it for gain by moving in a contrarian fashion.
Here's why this is a better strategy that succumbing to the lemming mentality: extreme optimism often coincides with market tops. People think the sky's the limit and send stock prices flying. However, savvier investors know that the time to sell is when prices are high. Likewise, extreme pessimism can be bullish for a contrarian investor. Toward the end of a big decline, the last bulls throw in the towel and sell with a vengeance. Cooler heads in such situations can see the fire sale happening and buy.
Studies have found that investors are most influenced by current events – market news, political events, earnings, etc. – and ignore long-term investment and economic fundamentals. Furthermore, if a movement starts in one direction, it tends to pick up more and more investors with time and momentum. The impact of such lemming-like behavior has been made worse in recent years because of more quantity of more sensationalist financial, economic, and other news than ever before. This proliferation of financial media inevitable affects investor psychology.
Strategies to Avoid Becoming a Lemming Investor
1. Stick to a plan.
2. Know your goals.
3. Pick a strategy that aligns with your goals.
4. Minimize your risk.
5. Don't succumb to greed or fear.
6. Understand your investing personality.
7. Stay within your investing comfort zone.
8. Stick to your investment approach.
9. Don't get sucked into the hype of "financial porn" financial media, publicity and advertising.