While the internet has made it easier and cheaper to buy and sell shares, it has also made it simpler to follow other investors. This can be a good thing if an individual decides to follow Warren Buffett or another successful investor, for example. However, in many cases what it means in reality is that investors follow the general consensus, and this can prove to be a disastrous move in the long run.
Information flow
In previous decades, news of changes in share prices or stock markets took time to be delivered. Even when received, it was not always possible to buy and sell shares quickly, while higher commission costs meant that in many cases investors would adopt a ‘wait and see’ approach before making changes to their portfolios. This encouraged a longer holding period, as well as a more consistent approach to investing.
Today, however, the internet means that news can be acted upon in an instant. While this may be a good thing overall, it also means that investors may become increasingly emotional about their portfolio holdings. Shares seem to move more violently than at any time in history, and they often change direction quickly even when news flow is lacking in substance.
The result of this is that many investors follow their peers into buying and selling at the wrong times. For example, selling is more common during bear markets, while the opposite is true during bull markets. And while this has always been the case to some extent, it seems to be more prevalent today with the faster flow of information and the increasing popularity of shorter-term trading in lieu of long-term investing.
Contrarian approach
For investors who wish to give themselves a higher chance of outperforming the market on their road to making a million, the best thing to do is to go against other investors. Being a contrarian investor can provide the opportunity to benefit from lower share prices in bear markets, with wider margins of safety being on offer to buyers of shares. Similarly, selling when share prices are high, but when other investors are still buying, could lead to increased profits in the long run.
Clearly, adopting a contrarian approach is easy in theory, but much more challenging in practice. That’s because it means doing the opposite of what the vast majority of other investors are doing. It can feel unnatural to buy shares when they are falling, or to sell them when they are rising. After all, the emotions of greed and fear are difficult to overcome.
However, through being a contrarian investor, it may be possible to maximise your chances of becoming a millionaire in the long run. It may take time for the strategy to have a significant impact on your portfolio, but it could prove to be a worthwhile move.