You will be able to explain how recency and herding push people to buy high and sell low.
Darren doesn't think of himself as an investor. But last year his office WhatsApp group spent three weeks talking about a US tech stock that had doubled in a few months. One colleague had bought early and kept posting screenshots. Another said it was "the next big thing". By the time Darren opened a broker account and put in S$2,000, the stock had risen for most of a year. It fell 45% over the next five months. He sold at S$1,100, sure it would go lower, and then watched it recover part of the way without him.
People tend to expect recent trends to continue. A stock, a fund or a market that has risen for a while feels like it will keep rising. One that has fallen feels like it will keep falling. Psychologists call the habit of giving recent events too much weight recency bias, and in investing it pushes people to buy after rises and sell after falls.
That's exactly the pattern behind the behaviour gap in lesson 1.3. Investors pour money into funds after strong years and pull it out after bad ones, so their money is heaviest in the fund just before it does worst. Nobody sets out to buy high and sell low. Recency makes buying high feel like following the evidence and selling low feel like getting out before it's too late.
The trouble is that past returns are a weak guide to future ones, especially over months rather than decades. A strong year often means prices now reflect a lot of good news, which can make the next few years harder. It doesn't mean a fall is coming, only that a rise is no promise of another.
Herding means buying or selling because other people are, rather than because of your own reasons. It's not irrational in every setting. If everyone is leaving a building, following them is usually wise. In markets it works less well, because by the time a crowd has formed, the price has usually already moved.
Herding used to work through newspapers, brokers and conversations at work. Now it runs through chat groups, forums, social media and short videos, where a stock or a coin can become the subject of thousands of posts in a few days. Each post makes the idea feel more widely backed and more urgent. The screenshots of gains are real, but you're seeing them from the people who bought early, posted at the high point, and haven't yet posted the fall.
Fake investment platforms and "insider" groups lean on this very hard, and Scam-proof your money, lesson 4.3, Fake celebrity ads, insider groups and trading mentors, covers how they work. This lesson is about the legal version: real shares and real funds, bought for the wrong reasons.
Fear of missing out is the feeling that everyone else is getting rich and you're being left behind. It tends to grow as a boom runs on. Early in a rise, few people notice. As prices keep climbing, more people talk about it, more people you know have made money, and the pull to join gets stronger. That means the feeling usually peaks when prices are already high, which is the worst time for it to drive a decision.
You can't know where the top is, and nobody else can either. What you can notice is when the main reason you want to buy is that other people have made money from it. Darren's reasons, written honestly, were "everyone in the group is in" and "it's gone up so much". Neither says anything about whether the company was worth S$2,000 of his savings at that price.
The habit that separates your view from the crowd's is simple: before buying any investment, write down why, in a sentence or two, and what would make you sell.
A written reason forces you to state something about the investment rather than about other people. "It's in my plan as part of my world equity allocation" is a reason. "The company earns more each year and the price is reasonable relative to those earnings" is a reason you can check later. "Everyone is buying" and "it's up 80% this year" are not reasons about the investment at all. If you can't write a reason that would survive a friend's questions, that tells you something.
The second line, what would make you sell, matters just as much. If Darren had written "I'll sell if the business itself gets worse" before buying, a falling price alone wouldn't have triggered the panic sale. He'd have had to ask whether the business had changed, and he'd have found it mostly hadn't.
Think about one investment you bought, or nearly bought, mainly because others were buying it, and what happened afterwards.
Write one investment you bought or considered because others were buying it and what happened next.
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