The Dangers of Investing in What Everyone’s Talking About
In my previous column, I discussed the risks of investing in what everyone is talking about and how financial hype has become a multi-million dollar business. Today, I want to shed light on the psychology behind this phenomenon:
1. Herd Mentality: Not Imitation, But Survival
Following the herd is an instinct, an ancient mechanism for survival. In prehistoric times, following the group protected you from saber-toothed tigers. Today, this same instinct leads you to buy what “everyone” recommends, even if you don’t understand how the investment instrument works or what the company actually does. Algorithms exploit this by prioritizing extreme content (“It will go up 500%!”) and burying critical voices. The result? You assume there’s consensus, but it’s just smoke and mirrors.
Our brains confuse “repetition” with “truth.” Seeing ten videos saying the same thing activates our “If everyone knows it, it must be true” instinct, even if it’s coordinated noise.
2. Confirmation Bias: Our Brain Blocks Painful Information
When following others and investing in a trendy investment, one tends to ignore risk warnings. Instead, each price increase is celebrated as “proof” that you were right. It’s self-protection. Admitting a mistake activates brain areas associated with physical pain, which is why our mind ignores the risks. Multiple studies have confirmed this: 83% of investors ignore negative signals even after losing money.
This is equivalent to building a mental bubble: a narrative where only data supporting your decision exists. If you buy a “meme” cryptocurrency because “its price will rise,” you’ll ignore that it doesn’t solve any real problem.
3. FOMO – Fear of Missing Out (Fear of Being Left Behind)
When an influencer shouts “Buy this now!”, your fear of being left out and missing out on success that others – the group – seem to be achieving kicks in. Humans evolved to survive in tribes; today, that instinct translates into buying what “everyone has” to feel like you belong.
You prioritize social validation over rational analysis. Our brain prefers to err with the group rather than succeed alone. That’s why, even if we can identify hype, there’s still that nagging feeling to buy.
Breaking the Cycle
1. The Taxi Test
Before investing, explain the opportunity to a friend who knows nothing about finance. If you can’t answer within 30 seconds: “What does the company do? How does it make money? What happens if it fails?”, then don’t invest. If your friend understands, it’s a real investment. If they’re confused, it’s hype.
Example: If you think of buying a cryptocurrency because “its price will rise,” but can’t explain how it works, what problem it solves, how many people use it, or how future demand will be generated, then it’s a gamble, not an investment.
2. The 1% Rule
Never bet more than 1% of your net worth on a viral investment.
Why it works: If you lose all your money, your net worth only drops by 1%. But if you gain 500%, your net worth increases by 5%. It’s an asymmetric bet: minimal risk, potential for high gain.
Remember that in 2024, 71% of those who traded CFDs lost everything. Those who limited their bet to 1% survived to invest in real opportunities.
3. The Panic Button
When buying, write down: “I will sell if [specific condition] happens” (e.g., “If the price drops 10% in a week, I will sell all to limit my losses,” but “If the price goes up 100%, I will sell 60% of my investment”).
Don’t invest without a written plan of when to sell. It works because if things go wrong, you exit before panic paralyzes you. If they go well, you reap profits and can let the rest run without fear of loss because you’ve already won.
Key fact: 92% of drops in “meme” coins exceed 30% within weeks. A -10% limit saves you from disaster.
What You Should Always Remember
Algorithms are designed to exploit your brain, not educate it. They prioritize entertainment over truth because that’s how they gain more engagement. But you decide whether to be a victim or a survivor.
Generally, when everyone’s talking about an instrument (like NVIDIA, Gold, Bitcoin, or the dog-themed cryptocurrency), it’s often a sign that it has already risen significantly, and it might be time to sell, not buy.
Remember again what Buffett said: “The market is a device to transfer money from the impatient to the patient.” Invest wisely, as if your wallet depended on it… because it does.
