One of the best ways to spot opportunity is “other people doing dumb things.”
That’s what Warren Buffett said at Berkshire Hathaway’s annual meeting.
“What gives you opportunities is other people doing dumb things. During the 58 years we’ve been running Berkshire, I would say there’s been a great increase in the number of people doing dumb things — and they do big dumb things. And the reason they do it, to some extent, is because they can get money from other people so much easier than when we started.”
It’s why we’ll often look to buy excessive fear, or excessive greed in an attempt to exploit that herd-like mentality. For example, “Buying when others were selling in fear has in part helped Berkshire return a whopping 3,787,464% from 1965 through the end of last year. That’s way more than the S&P 500′s 24,708% return in that time,” as noted by CNBC.
In fact, if we take advantage of the mistakes of herd mentality – there’s your opportunity.
For example, years ago, one sheep jumped off a cliff. Another followed. All of a sudden, hundreds of sheep began jumping off a cliff because everyone else was doing it. Jaws on the floor, shocked shepherds would watch 1,500 sheep jump off the cliff.
Hundreds of sheep died. Each followed and jumped simply because every other sheep was doing it. And as uncommon as this may sound, it’s not. In fact, this very same thing happens each and every day among traders and investors. We buy because everyone else does. We sell because everyone else does. But we never question what we’re really buying or selling, which can be quite costly. Instead, we take the leap simply because everyone else is doing it.
And if everyone else is doing it, it must be right. Right? Not exactly.
Remember, “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one,” noted Charles Mackay in Extraordinary Popular Delusions and the Madness of Crowds.
Granted, that was written in 1841. But what he had to say about the mass mania and the behavior of the crowd remains relative to this day… Again, as Buffett just said, one of the best ways to spot opportunity is “other people doing dumb things.”