How can investors avoid herd mentality?

Okay, friend, let's talk about this down-to-earth topic – how to manage yourself when investing and not get swept up in the crowd frenzy.

This is easier said than done. It's like going to a new place to eat: you see one restaurant with a long line and another completely empty, don't you instinctively want to join the line? If that place turns out to be bad, you console yourself: "Hey, not my fault, so many people were lining up!"

Herd mentality in investing works exactly like this. When prices rise, you fear "missing the boat," and when they fall, you fear "getting stuck." So, other people's actions become your mental reassurance. But the result is often that you end up "holding the bag" with everyone else at the market peak or "cutting your losses" at the bottom.

To avoid this "following the herd" trap, I've summarized a few effective methods, tried and tested, that might help you:

1. Be a Student First, Then Play "Stock God": Truly Understand What You're Buying

This might be the single most important point. Benjamin Graham, Warren Buffett's mentor, said it long ago in The Intelligent Investor: The cornerstone of investing is thoroughly understanding what you are buying.

Treat it like a business: You're not buying a ticker symbol; you're buying a part of a company. If you were willing to spend hundreds of thousands to open a milk tea shop, wouldn't you research its location, recipes, customer traffic, and competitors first? Buying stocks is the same. What does this company do? Is there demand for its product? How is its profitability? Is management competent?
Have a specific reason for buying: Don't let "everyone else is buying" be your only reason. You should be able to clearly state: "I'm buying it because I believe in its A, B, and C points, and I think its current price is below its true value."

In plain terms: Before jumping in based on the crowd hype again, ask yourself: "If the entire stock market were to close down for three years, could I sleep soundly still holding shares in this company?" If the answer is yes, that means you have confidence in the company, not the herd.

2. Write Your "Script" and Stick to It

The market is an emotional wreck. You can't expect to dance to its erratic rhythm. You need your own strategy.

Establish investment discipline: Set clear rules for yourself when you're cool-headed. For example:
- "For this stock, what's my target buy-in price?"
- "At what price level will I consider selling some of my position?"
- "If I'm wrong, at what price must I cut losses and exit?"
Write the rules down: Physically write them down, ideally, and stick them by your computer. When the market is swept up in mania or panic, human brains tend to short-circuit. Looking back at your clear, written decisions made calmly can snap you back to reality instantly.

In plain terms: This is like a "walkthrough" in a video game. Without one, you just stumble around, fighting whatever monster you see, opening every chest, and easily falling into traps. With a walkthrough, you know when to fight, when to avoid, and when to pick up gear. Your investment discipline is your game guide.

3. Know "Mr. Market" and Learn to Use Him

Graham also introduced us to a fascinating character called "Mr. Market."

Imagine the market as a somewhat neurotic business partner of yours. He shows up at your door every day, offering to buy your share of the business or sell you his.

When he's manic: The market is booming, everyone is euphoric. "Mr. Market" will offer an absurdly high price to buy your shares. Your thought should be: "Hey, here's my chance to sell part of my holdings to him at a premium."
When he's depressed: The market is panicking, everyone is wailing and gnashing their teeth. He'll offer to sell you his share at a ridiculously low price. Your thought should be: "Fantastic! Here's a chance to buy shares in a good company for peanuts!"

The key point: You are free to ignore him! No matter how emotional he gets, he's only offering you a quote. Use his mood swings, don't get infected by them. When everyone is panicking and selling, ask yourself calmly: Is this "Mr. Market" being irrational and handing me a bargain, or has the company itself actually taken a turn for the worse?

4. Deliberately Practice Being Contrarian

Following the herd is human nature. Overcoming nature requires deliberate practice.

Actively seek out opposing views: When you feel especially bullish on a stock and are about to go all-in, pause! Actively search online for articles, research reports, and comments criticizing it. See what the "short sellers" are saying.
Play "Devil's Advocate": Debate with yourself. Assume you are the biggest bear on this company. What arguments would you use to attack it? If you can counter all those arguments and still believe it's worth buying, then your confidence isn't blind.

In plain terms: It's like buying a car. Even if you really like Brand A, don't rush to buy. Go look at what owners of Brand B and Brand C complain about regarding Brand A. Check if it has any deal-breaking flaws you can't accept. Listen to all sides to be well-informed; trusting only one side leads to bias.

5. Manage Your "Information Diet"

In today's world, we're not short on information; we're drowning in it. Financial news, big-shot opinions, stock chat groups... all constantly influence your emotions.

Reduce how often you check quotes: Unless you're a professional trader, checking the market dozens of times a day does nothing but increase anxiety. Short-term price fluctuations are random noise.
Avoid "Stock Guru" Groups: Many groups are filled with emotionally charged stock pumping and angry tirades. This environment is the perfect breeding ground for herd mentality. Engage in high-quality discussions if present, but be wary of pure emotional venting.

In plain terms: Treat checking quotes and scrolling finance news like "eating." Do it at set times, in measured amounts, and only consume what's nutritious (like company financial statements, deep industry analysis), avoiding junk food (various rumors and clickbait headlines).

To Summarize

Avoiding the herd boils down to building an independent thinking system centered on your own research and governed by your investment discipline. This path is bound to be a bit lonely, because when everyone else is partying, you might be throwing cold water on it; when everyone is panicking, you might be quietly buying.

But believe this: on the investment journey, those who make it to the end are often not the fastest runners. They are the ones who can calmly study the map at the crossroads, refusing to follow the crowd blindly.