You’ve heard of bandwagon fans. You know, the ones who will only support a sports team if they’re doing well but will abandon them when they lose.
Hardcore fans stick with their team through thick and thin. Think of the long-suffering Detroit Lions fans who still show up at home games despite knowing their team will not likely make the playoffs in any given season.
Just like in sports, there are bandwagon investors. These investors jump in and out of stocks or crypto at the slightest buzz. They aren’t hardcore investors who stick it out for the long haul.
What explains bandwagon investing?
It turns out it’s deeply rooted in human nature: The bandwagon effect is a cognitive bias that causes people to think or act a certain way if they believe others are doing the same. If you’re unfamiliar with cognitive biases, they are defined as a systematic pattern of deviation from rationality. In other words, it’s a pattern of behavior that deviates from the norm – that differs from normal rational behavior.
The bandwagon effect has other names that you might be familiar with, such as “herd behavior.” What about the fear of missing out (FOMO)? These are names for behavior people exhibit as groups that they wouldn’t typically exhibit alone. The problem with the bandwagon effect, herd behavior, and FOMO are that you live and die by the herd as an investor.
Right now, the bandwagon effect is in full swing in the equity and crypto markets – with its genesis rooted in COVID-19 and stimulus checks. Millions of workers isolated at home due to nationwide lockdowns and social distancing decided to give investing a try for the first time in 2020.
Flush with stimulus money, newbie investors turned to the stock and crypto markets because of their access and ease of transacting due in no small part to the free trading platform Robinhood, which enabled investors to open and fund an account and start trading within minutes. Inexperienced with investing, many of these investors found it much easier to be a bandwagon investor rather than doing any financial analysis on their own.
These millions of bandwagon investors relied on social media for their investing choices. Twitter and Reddit (particularly subreddit r/wallstreetbets) wielded tremendous power in influencing the investment choices of a massive herd of bandwagon investors. With a single tweet or post, these social media influencers could move the needle on particular stocks and cryptocurrencies in ways never seen before.
Remember all the hoopla surrounding Gamestop (GME) stock at the beginning of the year? This is a classic example of the bandwagon effect.
For background, Gamestop is a brick-and-mortar video game retailer reeling from falling sales due to the pandemic. In March of last year, it traded at $3.50 a share, which was a fair representation of its underlying economic reality. Gamestop’s precarious financial situation made its stock a prime target for short-sellers.
As hedge funds picked up millions in short positions of GME stock, a funny thing happened. A group of renegade investors on subreddit r/wallstreetbets decided to wield their tremendous influence on millions of bandwagon investor followers to get back at these hedge funds. Leveraging social media, the wallstreetbets renegades created a buzz around GME stock to drive its price sky high – reaching an intraday high of 380 at one point in January.
Since January, GME’s stock chart has looked like an EKG chart from a patient with a heart condition. The extreme volatility and wild swings resulting from the bandwagon effect on GME stock have made and destroyed fortunes almost daily.
The bandwagon effect has stock and crypto markets trading at extreme overvaluations. The Dow is currently trading at a price/earnings ratio of around 30 – nearly double the historical average of 16.
Why should investors be concerned about the bandwagon effect?
Because overvaluation and cracks in the market like creeping inflation all point to an impending crash with investors jumping on the bandwagon as quickly as they got on.
Who will be the investors that will be left standing? It will be the hardcore investors – the ones who invest for the long haul.
These are the investors who have clear objectives and stick with them. Other investors may make fun of them for sticking with something that’s not as sexy as the latest bandwagon craze, but they don’t care what others think. They don’t care about the crowds.
Hardcore investors march to the beat of their drum, and that’s why they will survive the next crash, and the bandwagon investors won’t.
How do I know this? Because I am one of those hardcore investors. I stick with investments long-term – unconcerned about what others think.
I love mobile home parks (MHPs or manufactured housing), and just like Detroit Lion fans, I sometimes get ridiculed for my investment choices. It’s not sexy like the latest Twitter-endorsed stock or the latest Elon Musk-approved cryptocurrency.
When the market crashes, the bandwagon investors that were once making fun of my MHP investments will be looking to move into one of my parks in search of affordable housing.
It’s a proven fact that MHPs thrive during recessions. You only have to look to last year for proof. The MHP sector was the only other sector that saw increased occupancy and rents in 2020, and according to a recent businessinsider.com article:
“Mobile home parks were the top-performing real estate class in 2020, as stated by Green Street Data. Mobile home parks had a 12% increase in commercial property value when a majority of other commercial real estate asset classes struggled in 2020.”
Bandwagon investing sounds exhausting.
Wouldn’t you instead leverage the expertise of partners experienced in a recession-resistant and inflation-insulated sector protected from the bandwagon effect?
If so, consider passive investments in the MHP sector.