Buyer Beware: Following the Crowd

Sometimes following the crowd is fun, lucrative and works out well for us. There have been a number of times where I have gone to a restaurant, bar or club that was so heavily talked about and it was indeed a great experience. Other times I have followed people into experiences, business endeavors, or investments that sounded good at the time but ended up hurting me because I blindly trusted what everyone else was saying or doing.

In his book “The Delusions Of Crowds: Why People Go Mad in Groups”, William Bernstein talks of how history continues to repeat itself over and over again in places like religion, finance, etc. It happened with the dot com bubble. It happened with housing (which led to the Great Recession of 2008). It will happen again. While these are big, memorable and historic events of a more massive scale, these things also play out regularly at a smaller scale too.

Get rich quick.

Anytime something is portrayed as a “get rich quick” scheme, that should be a big red flag for you. Often it seems like people experience fast windfalls. That certainly does happen but it is far from the norm. The media loves to highlight a company going public and highlighting how the executive team is now worth a whole bunch of money. What you don’t see is that they built that business for over 10 years before being able to go public and recognizing that windfall. 

Another example of what may seem like a quick windfall without context is a completed deal. A friend may close the sale of a product or maybe they found a candidate for an executive position. Now they all of the sudden see a large commission. It sounds like it happened overnight, right? What is missing is that it took that person 18 months to find an executive fit or five years to cultivate the customer relationship before being able to complete the sale of a product to get paid.

Most people get rich over time by making many small, informed decisions every day. They do not get rich by making a one time decision or by following everyone else. If you get the vibe that something may potentially be a get rich quick scheme, you should ask yourself a couple of questions.

Why am I excited?

When you feel like you are getting super excited about something, take a second to pause and ask yourself “why am I excited? An example of this is happening now as the housing market explodes. Many people are wondering “Should I buy a house?” Many people watch never-ending highlights in the news and also know many of their friends, colleagues and family are considering purchasing a new home. It is not a far stretch for some to feel like they should do the same.

After taking a pause, they may realize the timing is not right for them and that they are simply getting excited because of the activity in the housing market. It’s fun to get excited but that doesn’t necessarily mean you should make that big decision because of that new found excitement due to everyone else being excited about it.

Does this make sense for me and my goals?

There are lots of really cool things out there. It would be great to experience all of them, right? In theory it would. In reality we have limited time, resources and expertise. It can be fun to do something new but you are always allocating your resources in some way. Whether it be your money, time, expertise, etc, you are making a trade, purchase or investment.

Ask yourself, does this make sense for me and my short- and long-term financial goals? It might be trendy to invest a bunch of money today because it is really popular and fun. Do you have the money to do so? Is it going to help you get closer to your goals? Are you willing to risk losing the full investment without significant damage to your current lifestyle?

If you would like to take a fun risk with money that you can lose without it having a negative impact on your day-to-day, that is your choice. If you cannot afford to lose the money because you need it to survive, then the fun gamble is not worth the time, energy, stress or resources.

Step up your financial knowledge with MFF.

We encourage you to follow the crowd of those using our free, online MFF Standards of Financial Literacy (SFL) course to help create their own path to financial independence. Join us today!

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