In this article, Gerardo Alvarez-Franyutti explores the pros and cons of following the herd when it comes to making business decisions.
“When Harvard MBAs flock to an industry, it’s a sign that it’s about to collapse” – Bill Sahlman, 2000
When approaching a toll road station, have you noticed how people tend to queue in the longest line instead of behind the shortest one?
There is something that feels instinctively right about doing this. Somehow, our brains seem to infer that if there is a long and a short line, people queuing in the long one can’t be wrong. There must be an issue with the short queue, and therefore we must patiently wait in the longer one.
A similar phenomenon happens when trying to identify opportunities. A herd mentality tends to develop around “hot” industries or companies, and the talented and ambitious tend to flock to them. Historically, some of these have included investment banking, management consulting, “dot-coms”, startups, AI, VR, “Unicorns” and the like.
And yet, similarly to the shortest queue, the best opportunities sometimes lie in the places where the least amount of people are looking at. Unfashionable industries or regions that are perceived as “risky” by most investors can hold pockets of excellent prospects. Outstanding returns can be obtained in old-fashioned companies, in developing markets and in “boring” places.
But spotting these requires the courage to go against perceived wisdom and to renounce the latest fads. It entails being perceived as “weird” or unfashionable.
Questioning the status quo implies being very analytical and looking at the fundamentals of a country, an industry or a company in a dispassionate way. For instance, the best opportunities can arise in periods of intense negativity, when everyone else is deserting the space in a wild stampede. In these instances, emotion tends to trump rationality. And great bargains are to be found.
Betting with the crowd can sometimes work in the short term. But over time it is those who dare to tread a different path who tend to reap the greatest rewards.
“The most courageous act is still to think for yourself” – Coco Chanel
“Strategy is about making choices; it’s about deliberately choosing to be different” – Michael Porter
“It’s the edges of the maps that fascinate…” – David Mitchell
Key points include:
Herd mentality and hot industries
Read the full article, The fallacy of the long queue, on LinkedIn.