The power of Groupthink

[LWJ]

I am exiting from a closely held investment currently. I bought in with significant reservations but had reasons that out-weighed the risk at the time. Since I bought in, I have seen other folks buy in. One person mortgaged his house to the absolute maximum (and is paying 7% I believe for this!) and used the cash to buy this investment.

My current analysis recognizes the fundamental problem as not being resolved. There are other issues as well. I reviewed this investment with someone who has significant experience with these sort of items and he thought the risk was even higher than I do.

But the folks who own it? Not one has asked me as to why I am exiting. They all think I have absolute rocks in my head. And one is super angry at me for not selling my portion to him.

When a prospectus says "past performance is not an indicator of future returns" are people completely blind?

I understand the allure of this investment. There are many reasons to buy it other than the return. The fact that nobody sees risk here is shocking to me.

Sorry about being so very vague about the investment. I can't discuss it any other way. My point is human behavior. All the investors are feeding back on each other about how this is the greatest thing ever. When the investment has a number of issues that could cause it to go sideways. Odd.

[KFC911]

Soooo.... how can I get in on this ?

Anybody that mortages a house at 7% to invest is my kind of guy to partner with.... or not.

People are definitely strange Bob.... me too !

I do buy a lot of cds through Fidelity these daze tho

[LWJ]

There were "other reasons" to invest besides risk and yield. I can't say more.

But risk? I am pretty happy to roll the dice on some things. My wife and I have 10 "buckets" that we invest in. One being our home. The diversity is a beautiful thing.

But my post was all about poor decision making and analysis. How a group of people feeding back similar information reinforces poor decisions and opinions. While the investment I referred to has paid very well over the last decades, there is a significant flaw that people just seem to ignore. Odd.

[masraum]

The folks that are investing risk-be-damned, are not really investing, they are speculating in the hopes of striking it rich.

Speculating is gambling in my book. I'm risk averse when it comes to investing. I do invest in the market, but I stick to low cost index funds to reduce risk.

I'd be curious to know how many of the investors would enjoy going to Vegas to gamble.

And yes, that type of investing has the possibility of making more money OR losing more money.

[masraum]

Originally Posted by LWJ

There were "other reasons" to invest besides risk and yield. I can't say more.

But risk? I am pretty happy to roll the dice on some things. My wife and I have 10 "buckets" that we invest in. One being our home. The diversity is a beautiful thing.

But my post was all about poor decision making and analysis. How a group of people feeding back similar information reinforces poor decisions and opinions. While the investment I referred to has paid very well over the last decades, there is a significant flaw that people just seem to ignore. Odd.

I'm sure there are several things going on. Confirmation bias is one of them. People see what they want to see and ignore the rest.
Another thing that's probably going on with some of them is the sunk cost fallacy. They have so much time and energy invested in this investment that they can't fathom pulling out.

[KFC911]

I'm definitely not averse to investment risks .... still have Enron on my statements .

And Canadian pot (stocks).... poof ... up in smoke like Cheech & Chong .

But mostly I have become ultra conservative these past few years in investing.... I can afford too .

Good luck LWJ .... do a Paul Harvey (.... the rest of the story) sometime if you can, and would like to share.

I wanna see what I missed out on ...

[Evans, Marv]

This has some kind of "belief group" feel to it. I may be wrong, but I've seen people in the past involved in that kind of thing, who have ended up getting burned. I've always been very conservative in my puny investment attempts. I've mostly invested in an old fund with a decent return history over decades that pays dividends. It's worked out pretty well over the decades.

[Seahawk]

Originally Posted by Evans, Marv

This has some kind of "belief group" feel to it. I may be wrong, but I've seen people in the past involved in that kind of thing, who have ended up getting burned. I've always been very conservative in my puny investment attempts. I've mostly invested in an old fund with a decent return history over decades that pays dividends. It's worked out pretty well over the decades.

I never give investment advice...nothing good every comes of it. I am like you Marv, except I probably floated some monetary investment stupidity in 10% of my investments. I have also adjusted my investments based on age and other variables.

Risk and investment versus speculation was a great quote.

[Tervuren]

[KFC911]

Originally Posted by Tervuren

I bought Canadian .... a year later it looked like an M80 had it's way... busted into teeny-tiny pieces

[zakthor]

Not about group think per say - is more about the fundamental nature of risk - but there's a pretty great book called "The Black Swan - The Impact of the Highly Improbable" by Taleb. Its not "The Black Swan" about the murderous psycho ballerina.

That book gave me a new way to appreciate reality. Main point is that people's intuition is based on what they've seen and are familiar with.

All those happy people in your investment... sounds scary to me also. But sometimes there are pretty great deals even in the real world. Own a car dealership, or an nfl team. Those guys all stand around smiling and ka-chink their glasses.

[LWJ]

I can give a “Paul Harvey “ in a bit. Maybe 3-6 months?

I think confirmation bias is spot on. They truly are only seeing what they want to see. There is ego involved as well.

[Por_sha911]

The power of greed overwhelms rational behavior.
People become upset when you point out the risks. They want everyone to just nod their heads in unison and tell each other how wise they are.
This is why Ponzi scams and Nigerian scams work so well.

[pwd72s]

Originally Posted by LWJ

I am exiting from a closely held investment currently. I bought in with significant reservations but had reasons that out-weighed the risk at the time. Since I bought in, I have seen other folks buy in. One person mortgaged his house to the absolute maximum (and is paying 7% I believe for this!) and used the cash to buy this investment.

My current analysis recognizes the fundamental problem as not being resolved. There are other issues as well. I reviewed this investment with someone who has significant experience with these sort of items and he thought the risk was even higher than I do.

But the folks who own it? Not one has asked me as to why I am exiting. They all think I have absolute rocks in my head. And one is super angry at me for not selling my portion to him.

When a prospectus says "past performance is not an indicator of future returns" are people completely blind?

I understand the allure of this investment. There are many reasons to buy it other than the return. The fact that nobody sees risk here is shocking to me.

Sorry about being so very vague about the investment. I can't discuss it any other way. My point is human behavior. All the investors are feeding back on each other about how this is the greatest thing ever. When the investment has a number of issues that could cause it to go sideways. Odd.

And then, Bernie Madoff became successful.

Borrowing to invest is a fool's errand..

(edit) This is why I only invested in quality mutual funds. I know my odds of outwitting brokerages and others with all their MBA's and supercomputers would be slim and none. To each their own, but no individual stock picking for me.

[nota]

bet long AGAINST the herd

when putin went head to head with saudi and oil was cheap I said here go long

now that oil is high a smart bet would be to put on the very long side
from what have learned the USA oil market does not offer that but euro markets [bret] do

I would never bet more then you can lose without pain so no home loans
but look at that type of gamboling as far better odds then the bookies long term
plus it can pay you got to wait for it so not instant losses

[LWJ]

Update-it is my employer that I sold shares in. So far, the other folks are well up on the returns. But, owning a piece of the action (and participating in the awful politics and having zero input) was a soul sucking exercise that I hated.

I suspect that the current shareholders will clean up. But it could have (may still) go sideways.

Bigger update coming shortly.

[sugarwood]

Do you work for Nike ?
It is common knowledge not to invest in the company you work for.
Poor diversification. You lose both your paycheck and nestegg if firm tanks.
See Enron

[Superman]

Originally Posted by nota

bet long AGAINST the herd

...

A philosopher once suggested this. I forget who. One of the Empiricists. Probably Hume or Locke.

"Get on the bandwagon" makes for great marketing, but poor logic.

Then again, most popular stocks are overvalued, as compared to objective measures such as total assets or NPV of expected earnings. They are overvalued because the stock market is a casino where the "bandwagon" phenomenon is a main driver of stock prices.

That said, yes I do have substantial equity holdings. Go figure.

[LWJ]

Not Nike! That would be many of my neighbors! Who buy the stock as well!

A small little local company. No names. Thanks.

[Helix8]

In some company cultures owning stock in the enterprise is the cost "membership" if in the C suite or for those aspiring to advance in the organization. A true believer as it may be.