Social Proof: The herds and investing

We associate herding with animals. Actually, herding is evident in the human world; in business, in the consumer world and particularly in investing.

What is herding and why does it happen?

And why do herds often form on the basis of such little information? Why do herds form even when that information or such behaviour may be mistaken?

The answers to these questions can be found in something called social proof.

What is social proof? 

Social proof is when people follow the actions of others in an attempt to reflect the “correct” behaviour for a given situation.

This urge to conform to established patterns or to follow the lead of perceived authority figures, trendsetters or simply people “in the know” is the social glue that binds people into a herd. Social proof is the underlying psychological bias that results in what we recognise as “groupthink” (or “risky-shift”) behaviour.

Does this matter? 

In many aspects of life, this tendency to conform and follow is beneficial. In fact, social proof is one of the key human traits that underpinned our evolutionary move to community-based civilisation.

The impulse to act like others in the tribe would have been powerful for millennia.

It follows that the operation of social proof is cumulative and carries a reflexive, self-reinforcing momentum. As the effect ripples out across a larger number of people, the size of the herd will multiply, encouraging more people to confirm the assumption that this must be the right way to act.

But just because many are doing a particular thing, does not make it correct.

What’s the proof?

The best-known experiment that showed the concept of social proof was carried out in 1935 by Muzafer Sherif. He put people into a darkroom and showed them a dot of light several feet away. In reality the dot was not moving but, due to the autokinetic effect, it appeared to move to individuals by different degrees.

When asked individually and then in groups how much it moved, individuals deferred to the group estimate even when it was out of line with their experience. Given the movement of the light was ambiguous, Sherif showed that the participants were relying on each other to define a group-informed “reality”.

The evidence suggests that the social proof bias is amplified in complex situations where the “right way” to act is ambiguous yet the importance of being accurate is critical. In the midst of this complexity, the assumption made is that surrounding people possess more knowledge about the situation.

Investing, then, offers perfect conditions for social proof to operate in an exaggerated way, giving rise to the herd behaviour that can drive bubbles and bursts.

Herded investors

When stock markets are falling, there is a strong pull on our emotions as social proof (and loss aversion) encourages an urge to sell if we see others doing so.

Why are others selling? Do they know something we don’t?

The evidence from behavioural finance suggests the answers to these questions could be surprisingly irrational – that people sell because others are selling.

In stock markets, it is clear that herd reactions don’t need rational thought for fuel.

Think long-term

In the long run, stock prices tend to reflect the intrinsic value of companies. In the short-term, however, the market is often a barometer of changing investor sentiment and a reflection of the average view of the players in the market at that moment.

So why would you aspire to follow the average investor?

We know from stock-market holdings data that investors are prone to short-termism – stock-holding periods have fallen significantly since 1985. The evidence suggests that some investors – the Chinese in particular – are more short term than others. We know that stock-market participation has broadened significantly in China in recent years as many individuals have opened trading accounts. While institutions still own most of the market, data suggests these small investors can account for as much as 80% of daily trading on the domestic Chinese exchanges.

This raises the possibility that falls in the Chinese stock markets, triggered by short-termist investors, can trigger sympathetic falls in other markets via social proof and herding.

In today’s synchronised world, it seems like only the first domino need falter to set off a sentimental chain reaction.

Don’t play copy-cat 

Another interesting dynamic to consider is whether there may be large forced sellers in the market. These may or may not be “trend-setters” worth following, yet their large influence on the market could nevertheless trigger trend-following behaviour.

The sovereign wealth funds of large exporters and oil-producing countries, for example, have accumulated large holdings of stocks in recent years. If an oil-producing nation were to sell stocks held in these funds to raise cash due to the hit a lower oil price is having on the government’s fiscal position, and that is instrumental in setting off a decline in stock markets, should investors around the world become nervous? Possibly, but then again perhaps these are investors who are exposed to companies who benefit from a lower oil price?

The market will correct itself 

Certainly, it seems like social proof can trigger and exaggerate herd behaviour in the absence of rational drivers. Fortunately, there are natural limits to directional herd behaviour as trends fizzle out and sellers become exhausted.

At some point, when the gloom is felt to be overdone, a new trendsetter often emerges – the value-driven investor – who may kick off a new herd behaviour that acts in the opposite direction to encourage a rally in stocks.

With all these mini trends and trend-reversals, the job of keeping up with them is nigh-on impossible – the trading costs would also be onerous. It is little wonder then that successful investors all agree on one thing – the benefit of taking a longer-term view.

In the end, the stock market is rational and reflective of human consumption and human endeavor. It’s people, and their tendency to follow the social norm too quickly, which is irrational.

Reproduced with permission of Fidelity Australia

Please note: The advice in this article is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.


As the year comDavid EoYes to an end, you will see in the media the so-called financial experts trying to predict what the share market will return in 2016.

Personally, I never make short term predictions about the share market; but if I did it would similar to Nick Murray’s prediction for the US market for 2016. Many people say if the US sneezes we get a cold, however I hope we get what Murray predicts the US will receive in 2016:

“We’re simply observing that five hundred large profit-seeking companies, managed by experienced professionals, are currently planning to commit very large cash sums to strategies which might, if successful, result in both direct and indirect benefits to the patient, diversified, long-term investor”. Nick Murray, Client’s Corner, Dec 2015.

To find out more, I urge you to visit Nick Murray’s website and subscribe to his Newsletter Client’s Corner. The article is entitled How Companies Are Planning To Reward Shareholders In 2016. I also recommend, if you have not already done so – that you attend our free information evening Common Sense Investing. We have dates scheduled for January, however if you are still enjoying your holidays, our 2016 dates and can be viewed here.

Merry Christmas and Happy New Year to all.

David Ramsay, CEO and Founder


A friend came to me the other day asking about shares and to look into a new ‘share trading’ app he had seen advertised on Facebook. He explained that by investing in shares he could turn $250 (the minimum deposit requirement) into $900 in a matter of hours!

This had me thinking, do many people my age see investing in shares as a get rich quick scheme or a way to make a quick buck? From various conversation with friends and family members it seems that they do.

I believe this is the wrong way to think. Shares should be seen as an investment which is held for the long term, providing regular dividends and long term capital growth. We, as young adults, don’t need to find the next speculative stock which share price may double tomorrow.

We have so many years ahead of us that we should be more concerned about creating good saving habits, establishing a sound financial strategy and investing in the right kind of shares. These ‘right kind of shares’ will grow in the background without the need to regularly log onto a share trading app to see if your investment has double (or halved in value) and then quickly sell at the right time. These ‘share trading’ apps sound a bit like gambling to me!

We should be buying the right kind of stocks, holding them for the long term and reaping the rewards of compounding. The information evening that we host at Income Solutions every month (called Common Sense Investing) is a great place to start your long term journey and perhaps hear a new point of view.

If you’d like to hear more, register NOW!

Patrick Dwyer, Associate Financial Planner

The Ordinariness of Equity Market Corrections

We have been reminded of late, that sudden, sharp pull-backs in equity prices have not gone away. In fact, they have always been with us—not just lately.

Please refer to table below documenting downturns (drawdowns) since 1928-2014.  Note, this is the US market.

David Blog

Downturns are normal.  I find it fascinating to watch the way our media report these events.  Please refer to the Herald Sun articles below, dated seven and a half years apart—rolling out the same bear image and downward trending line in both articles.

Herald Sun, Wednesday, January 23, 2008

Unfortunately many people will panic; it is easy to see why with this sort of reporting.  People will respond counter to how they should in order to build wealth.  Just as it was in 2008, and every other downturn in history, the correct strategy is simple—hold onto your equity holdings, purchase more of them and wait for your dividends.  These times bring golden opportunities to build your portfolios and increase your dividend (income) stream.

I really recommend coming along to one of our Common Sense Investing information evenings – we talk about this kind of media hype and you’ll also learn about:

  • What causes volatility and what impact it has on your long term investment strategy
  • What asset class (property, shares, cash) will look after you for the long term

Register now for either Geelong or Melbourne!

By David Ramsay, CEO and Founder


The pitfalls of property development for profit

When contemplating wealth creation strategies, my experience tells me a great number of people are attracted to the idea of taking a derelict or unloved property (think ‘renovators delight’) and turning it into a buyers dream with bidders climbing over each other to own your masterpiece.

With the Auctions for the TV Series The Block (Series 9) airing on Channel 9 recently, here are some key lessons the latest series has delivered to anyone considering developing property to make a quick buck:

The Human Cost:

‘Time is money,’ ‘there are not enough hours in the day.’ Ever heard these sayings? Well, juggling your day job and trying to renovate could seriously detract from your performance at work. Focusing on ‘your purple box’ (your Career/Business) is the best investment you can make; if outside influences detract you from performing your role, your boss might not look upon you favourably, or your business might suffer as your mind is busy elsewhere. People also under-estimate the stress this can put on a relationship.

Furthermore, ( took a look at the hourly rate earned by contestants Darren & Deanne and Michael & Carlene and concluded they were paid just $10.71 per hour for the work they put in to their apartments.

The Hidden Costs:

Without a doubt the most frustrating component of The Block, personally, is the lack of transparency around the true costs associated with the Development – the location was mocked up as an old Channel 9 office block, but was in fact the old headquarters of communication technology company Vixtel. The cost of acquiring the site, the interest costs on the loan required to purchase the property, costs for Products and Services provided to The Block by sponsors such as The Good Guys, Mitre 10, Beaumont Tiles and Reece Plumbing, plus Government Taxes and Selling Costs don’t seem to be reflected in the ‘Reserve Prices’ set for the Apartments.

For the average mum and dad looking to add value to a property and turn it over for a profit, these are all very real costs which must be taken into account and factored into your planning.

The Risks:

As seen in The Block finale Auctions, when you have only a few, or even just one (or maybe none!) interested parties to purchase your property, it becomes very difficult to drive the price up to push you into a profit position. As property is a very illiquid asset, if you get yourself into a position where you’re needing to sell quickly you might not be able to wait until you can get a price that better reflects your efforts. Holding costs such as loan interest continue to build up during this time. Furthermore, if you own your own home and are branching out into property development to try to create wealth, you have all your eggs firmly in the one basket; domestic real estate. If there is a market crash, this now impacts both your personal (home) and financial (Investment Property) asset values.

The Experts:

If you’re a professional Property Developer, there is no doubt you can make money in development (much the way a Doctor makes money through advising patients or a Financial Adviser through providing financial advice). If you’re not, chances are you will find the going much tougher. Tradespeople are renowned for upping their prices for mum and dad developers. I’ve also heard countless stories of appliances being stolen from properties just days from settlement. If you intend on taking on this sort of project, factor in costs of bringing in professionals; don’t flatter yourself with huge estimates of cost savings through DIY.

Finally, always seek advice from professionals such as your Financial Adviser when contemplating any investment. To book a consultation with an Income Solutions Adviser contact (03) 9654 0555 or (03) 5229 0577.



By Steven Nickelson

Certified Financial Planner

Please note: The advice in this article is of a general nature only and has not been tailored to your personal circumstances.  Please seek personal advice prior to acting on this information.



Buy your shares – then leave them alone!

During the five-year period 2009 through 2013, the Standard & Poor’s 500-Stock Index produced an average annual compound rate of total return of 17.91%. For the same time frame, NASDAQ returned an annualized 22.95%. Harvard University’s endowment fund earned 1.3% per year.

The people running Harvard’s money were not to be taken in, as mainstream equities hit the bottom of their greatest crash since 1929-32, by values not seen in our lifetimes, nor by prices that will never be seen again. They were entirely too sophisticated for such Neanderthal thinking.

So, it should come as no surprise that the CEO of Harvard’s endowment fund, who was paid $4.8 million in 2012, announced in June that she is stepping down. (She was the fourth person to hold this job in the last nine years)

We are responsible for helping people accumulate capital over decades, and for husbanding that capital as they withdraw from it for decades more. Thus, we are expected to offer the one thing without which the benighted individual investor must perish: a long-term and even lifetime perspective.

My perspective is that the collective of the economy’s productive enterprises will give their long-term shareholders an income stream which will continue to grow over time.

An example of this is Caterpillar Inc who’s CEO, Doug Oberhelman, recently submitted the following Press Release: ““We are proud of our long dividend history, in which Caterpillar has paid a cash dividend to our stockholders every year since the company was formed in 1925. We are equally proud that during this period, our equipment and services have helped build, grow and power the world.”

Now to capture this value, you just need to own the shares and leave them alone, which seems very easy but proves impossible for most people – even the most highly sophisticated people at Harvard.


By David Ramsay

 Principal Financial Planner

Please note: The advice in this article is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.

Source: Nick Murray Interactive Volume 14, Issue 8 dated August 2014

Low Deposit Loans

There has been recent discussion in the media around whether or not we are setting ourselves up for a sub-prime mortgage crisis like the one which occurred in the US.  It was this crisis which ultimately caused the Global Financial Crisis.

To what extent this doomsday scenario has validity is up for debate. Certainly the apparent continued ease of available credit relating to home purchases and the increase of more aggressive promotion of low deposit loans is a little worrying.

An article from the Australian Financial Review dated Monday 14 July titled “The $2500 house deposit – high risk mortgages return’ raises some key concerns (although manages to miss others).  It is certainly worth a read. The danger is the appeal of low deposit loans reaches out to those who are least able to afford what they are borrowing.  The voice for the counter argument is far quieter than the megaphone used to tell us all, “‘we must own our own houses!”

For me, the starting point is to think seriously about whether or not you really have to own the accommodation you live in. Although I don’t agree with it, I accept that in Australia the concept of long- term renting is frowned upon. Also, there are key differences to countries like Germany where long term rentals are the norm. With all that said, it is possible to rent comfortable, suitable accommodation over an extended period and make great strides towards your long term financial security.

If you feel there is no alternative to buying, then consider three key points:

1.       Be realistic about what you can afford. 

It doesn’t mean in relation to what you have saved as a lump sum deposit, and certainly not what the lenders are willing to loan you.

Work it out on the basis of what you can reasonably afford to pay each month or each fortnight, with a target of having the loan repaid much faster than the 30 year term, and without sacrificing all aspects of your lifestyle.

It might be reasonable to cut back on a few dinners out or have one less holiday each year, but if it gets right down to counting every last cent then you may have over committed.  The appeal of owning your own bricks and mortar will wear off pretty quickly if you end up feeling trapped indoors all the time because you can’t even enjoy some simple pleasures.

2.       Set your own time lines.

Just because it seems everybody else is doing it doesn’t mean you have to – at least, not as soon as they are.

Constantly being told, “Property always goes up” (which it doesn’t) or feeling like you are being left behind because friends are buying houses; or even having parents tell you, “The sooner you get on the ladder the better,”  is really unhelpful.

We don’t always know the financial ins and outs of our friends or the specifics of our nearest and dearest.  We can all think of some people in our lives who seem to live a fantastic lifestyle, but we question how they can afford it. Typically a lot of ‘bad’ debt has been accrued, which only serves to be a huge barrier to genuine, long-term wealth creation.

Buy when you are able, not when others think you should, and buy something you can see yourself in for the long term.  This is for a simple reason: stamp duty.  People constantly say, ‘”Rent money is dead money.” No, it’s not, particularly if you are able to make sensible use of the difference you pay in rent versus what you would contribute to a mortgage.  True dead money is paying three lots of stamp duty in ten years as you move from an apartment to a small house to a family home or to a new area in which you would rather live ‘now you can afford it’.

3.       Loan Product.

Simply, it is not all about the interest rate.  If you establish a loan purely based on interest rate you will be forever chopping and changing – rate shopping on a frequent basis.

It is far more valuable to get the right loan from the outset which dovetails to your long term investment strategy, and enables you to repay the mortgage as fast as is practicably possible.  You will end up with a far simpler and more cost effective banking structure over all.


By Gareth Daniels

Financial Planner

Please note: The advice in this article is of a general nature only and has not been tailored to your personal circumstances.  Please seek personal advice prior to acting on this information. Before making a decision to acquire a financial product, you should obtain and read the Product Disclosure Statement (PDS) relating to that product. Past performance is not a reliable guide to future returns. 

Get your Share

A share is called a share because when you buy it you are buying a share of a particular business.  You become a part-owner of a business.

We are all part-owners of great businesses, if not directly in our own names or within a managed fund, then through our superannuation funds.

Being a part-owner of something is a wonderful thing, particularly in this context as it is so easy.  The business you own doesn’t require you to put any time or effort into it.  The company directors run the ‘shop’ as successfully as they can and you, the business owner, reap the rewards.

Any business owner will tell you cash flow is the key, and whilst turnover is vanity then profit is sanity.  Never lose sight of the fact you, as part-owner of the business, are entitled to share in its success and, most importantly, share in its profits.

When a business such as the Commonwealth Bank of Australia (CBA) posts a first quarter record profit putting it on track to make over $8 billion in one year, remember your part-ownership of the business entitles you to share in the profit – with no time, effort or energy required by you.

Your share in the ownership means you are part of something worth (in the CBA example) $125.7 billion which is nice, but it doesn’t mean much. The company’s worth may fluctuate quite a lot over time. Something you will also share in is the result of human endeavor and innovation, met by consumer need and demand – a healthy profit.

The activity of demanding goods and services and the ability to meet this need, is all that drives the profit.  Therefore, don’t get ‘hung-up’ by the value of your share, get excited about the entitlements it gives you to profits, which is ultimately a truly passive income.

For further information on Common Sense Investing, come to Income Solutions free Information Evening.


By Gareth Daniels

Financial Planner

Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.


Will I have enough to retire comfortably?


It seems each week an article appears in one newspaper or other attempting to pull the rug from underneath the greying old folk who are thinking about retirement. The sentiment is always gloom and doom, and whilst some long standing rules have recently changed, there are common sense strategies which can be implemented to achieve a well-funded retirement. Ironically, as rules are changing these strategies remain tried and true.

One common sentiment is that Australians will be forced to work longer. For those born after 1957 the retirement age has already increased from 65 to 67 years of age. I think for many people this prospect is not very palatable; however Australia cannot afford to support the baby boomers and future generations who could spend 35 years or more in retirement.[1]  A couple aged 60 years today, have a 50% chance one of them will live past 90 years of age [2] and those born today could well live as long as 125 years.[3]  I think drastic measures are required sooner rather than later.

This then leads to how much income you need in retirement. The Association of Superannuation Funds of Australia (ASFA) estimates a couple will need an annual income of $33,120 to achieve a modest standard of living in retirement. The same couple will need an annual income of $57,195 to achieve a comfortable standard of living in retirement. To meet the level of comfortable income, the couple will need a lump sum of $744,000 if retiring at age 65, with an average life expectancy of 85.[4].

With the age pension currently providing a couple with an annual income of $32,416.80 there appears to be a definite shortfall if you rely solely on the aged pension.[5]   It would seem the notion “I’ve paid taxes all my life and will now live on the age pension” is a thing of the past. Baby boomers may suggest raising taxes as the answer; however I think Gen X and Gen Y, who are already working to an older retirement age, would not agree. So what is the answer?

There are definitely things you can do to take control of your retirement. Here are our tips:

  • Firstly, seek professional advice. If you don’t already have a Financial Planner, find one!
  • Establish current and anticipated future income needs. Doing a family budget is the best place to begin. Don’t forget to add any lump sum expenses such as an overseas holiday or purchase of a new motorcar.
  • Seek professional assistance to understand your tolerance to investment risk; make sure you fully understand the options available; and ensure you understand the advantages or disadvantages of each investment asset class. This is the only way you can make an informed decision about how to invest your savings to suit your individual needs.
  • Develop a well-researched and easy to follow plan and make time to regularly review your plan. Chasing returns from the previous year or following “the next best thing” is no guarantee for success. In fact, this regularly result in negative outcomes. Set in place a plan which works for you and stick to it.
  • Do something now – the sooner you start, the better the outcome.

By Nick Cooper, Senior Financial Planner

The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. Whilst it is believed the information is accurate and reliable, this is not guaranteed in any way.

Please note: The advice in this article is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.

[1] The Australian Government Productivity Commission research paper “An Ageing Australia: Preparing for the Future” November 2013

[2] Australian Bureau of Statistics 2011

[3] Association of British Insurers

[4] ASIC Moneysmart –

[5] Rates effective from September 2013 and include the base rate, the age supplement and clean energy supplement.


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