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Follow The Money, Not The Masses

The state of the economy is not good. Inflation and high gas prices are weighing down the average consumer – many maxing out their credit cards to get by.

In April, credit card loan balances jumped by 17% from a year earlier, the fastest pace of growth since 1996, according to Federal Reserve data. The Fed hiked interest rates to corral runaway prices by 0.75 percentage points this week. The idea is to stall consumer and business spending to weaken demand to bring down prices.

One of the biggest fears is that the Administration’s and Fed’s response to inflation is too little too late, with stagflation – a stagnant economy coupled with inflation – now considered a credible threat.

Michael Burry of “Big Short” fame thinks the Fed’s response is too little too late. He recently slammed President Biden and both the Treasury and Federal Reserve for their pandemic-era fiscal policies and accused them of being ignorant about history and worryingly blind to the risk their pandemic-era policies would result in crushing inflation.

Amidst all the economic uncertainty, the stock market has taken a nosedive – down more than 1,200 points in the past five days and down more than 18% year-to-date. If you’re invested in the stock market, you have two options:

  • Go along with the crowd and follow what everyone else is doing; or
  • Pivot.

When it comes to investments, don’t follow the crowds. The crowds are usually wrong because data, logic, and numbers all go out the door when making investment decisions.

“Where we all think alike, no one thinks very much.” Walter Lippmann.

Groupthink is a powerful force that is detrimental to stock investors. Groupthink is a phenomenon that occurs when a group of well-intentioned people makes irrational or non-optimal decisions spurred by the urge to conform or the belief that dissent is impossible.

Groupthink in the stock market is real and drives behavior detrimental to the herd. It makes the crowd overpay in one instance and liquidate too early in others. The result is extreme volatility in the markets and severe losses in portfolios. For example, back in 2008, the Great Recession essentially cut 401(k)s in half for investors hoping to retire that year. Imagine retiring with only half of what you were planning on. In this case, the results of following the crowd were disastrous.

One option for investors in this environment is to stick with the crowds and follow the masses. The other option is to pivot and follow the money.

“It’s not always easy to do what’s not popular, but that’s where you make your money.” -John Neff.

Money is made doing what is not popular with the crowds. The wealthy are wealthy because they don’t follow the herd. They make investment decisions based on concrete metrics, data, and math instead of conformity, social pressures, or emotion like the masses. They’re willing to do what’s not popular, and that’s why they’re in the minority of successful investors – because the majority prefer to follow the masses.

Every investor starts with good intentions, but most investors get derailed by the crowds – following what’s popular for the sake of conformity – instead of sticking to basic investment fundamentals.

What many don’t realize is that following the crowds is not a good idea for multiple reasons:

  • It’s dangerous, as 2008 proved.
  • Hype blinds the ability of investors to make solid investment decisions.
  • Uncertainty is ingrained in the stock market, and it drives irrational behavior.

A meme, a tweet, a pandemic, international conflict, or a natural disaster is always lurking in the shadows, ready to wreak havoc on the markets. This constant uncertainty guarantees that the crowd will continue making irrational decisions.

The wealthy have very clear investment goals: building and maintaining wealth to achieve financial independence. I imagine every investor wants the same thing, but the brave investors are unwilling to conform and take their path to find success.

What are their options for investors seeking to break from the crowd and pivot? Do what the wealthy do and leverage the calm recession-resistant waters of alternative, non-correlated assets to generate cash flow, appreciation, and significant tax benefits to achieve financial independence.

Few are the investors willing to free themselves from conformity to include alternative investments in their portfolios, but those who do experience greater returns at less volatility and risk – a far more favorable result than going down with the crowd.

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