Seven Deadly Sins of Investing: Part 7

“When people are free to do as they please, they usually imitate each other.”     – Eric Hoffer

If you haven’t read them already, the six previous parts of this series can be found below:

Education

Seven deadly sins of investing: Part 1

View

Education

Seven deadly sins of investing: Part 2 - The hot-hand fallacy

View

Education

Loss aversion and the sunk cost trap: 7 deadly sins of investing

View

Education

7 deadly sins of investing: the base-rate fallacy

View

Equities

Seven deadly sins of investing: Confirmation bias & the death of the bear case

View

Equities

7 deadly sins of investing: The anchor you don't know you've dropped

View

Each of those sins lives inside an individual investor’s head. They describe how one brain fails to process information cleanly.

This final instalment is different. Herding is not a bias of the individual but of the group. It is what happens when all the other sins are pooled together and amplified by the fact that humans do not operate in isolation. We watch each other. We calibrate against each other. And in markets, we buy and sell each other's ideas.

It is the social bias that sits on top of all the others, and it may be the most powerful of the lot.

The lines

In 1951, the psychologist Solomon Asch ran an experiment that has become one of the most replicated findings in social science.

A participant sat at a table with seven other people to take a simple visual test. Three lines of obviously different lengths were shown on a card, and each had to say aloud which of the three matched a reference line.

What the participant did not know was that the other seven were actors, instructed to unanimously call out the wrong answer on certain trials. When the participant's turn came, they faced a choice: trust their own eyes, or go with the group.

Around 75% caved at least once. Many admitted afterwards that they knew the group was wrong but could not bring themselves to say so. The social pressure of a unanimous group, even one of strangers with no authority and no stake in the outcome, was enough to override what the eyes could plainly see.

Now imagine you are not comparing lines. You are valuing a stock.

Why the crowd wins the argument

Keynes made the point in The General Theory (1936): investing is not really about valuing assets. It is about anticipating what others will pay for them. Once you accept that framing, herding stops looking like a bias. It starts looking like a rational response to the game being played.

Inside a professional investment firm, this has a quieter name: career risk. Keynes had a line for that too: "it is better for reputation to fail conventionally than to succeed unconventionally."

Consider a fund manager who believes a popular stock is badly overvalued. If she sells and is right, she has done her job. If she sells and is wrong, she has underperformed on a stock everyone else owns, and she will have to explain herself to her clients. If she holds and it collapses, she has lost money, but so has everyone else, and the conversation becomes about market conditions rather than her judgement.

The incentives do not reward independent thinking. They reward being wrong in company.

A century of crowds

Nobel laureate Robert Shiller has spent much of his career documenting how this plays out at the level of entire markets. His cyclically adjusted price-to-earnings ratio, or CAPE, smooths earnings over ten years and has been tracked continuously since 1881.

Every major peak on that chart is a crowd event. The late 1920s. The late 1960s. The dot-com bubble of 1999 to 2000. Each one looks in hindsight like an obvious mania. Each one, at the time, felt to participants like the new normal.

Sun Microsystems built servers and workstations that powered the early internet. "We put the dot in dot com", its slogan read. On 27 March 2000, the stock was trading at $64, a market capitalisation of roughly $200 billion, and ten times revenues. Four years earlier it had been around $5.

Two years later, with the stock back near $5, Sun’s CEO Scott McNealy gave an interview to BusinessWeek that has become one of the most cited moments in modern investing. He walked through the maths of his own peak valuation. At ten times revenues, he pointed out, an investor would need the company to pay out 100% of revenue as dividends every year for a decade just to break even. That assumed zero cost of goods sold, zero operating expenses, zero R&D for ten years, and no tax anywhere along the way. Having calmly laid out how ridiculous those assumptions were, he closed with four words: “What were you thinking?”

Sun never recovered. It was acquired by Oracle in 2010 for $7.4 billion, a fraction of its peak value. The company was real. The business was real. What was not real was the price the crowd had agreed to pay for it.

Herding is not always wrong

Here is the part that usually gets left: herding is not always a mistake.

Markets have a function, which is to aggregate the views of many participants into a price. When the crowd is right, following it is the same as being informed. The trend is a signal. Strategies that systematically lean with the crowd, from momentum to trend-following, have delivered long-run returns across markets for good reason.

The problem is not following the crowd. The problem is following the crowd without knowing why, and without a framework for recognising when the crowd has detached from the underlying reality of the businesses it is pricing.

This is where process matters.

How we think about it

A systematic, valuation-aware process does not try to escape the crowd. That would be both impossible and undesirable. Our net exposure to equity markets is 100%, so when the market falls, we fall with it. We do not pretend otherwise.

What the process does is anchor every decision to something other than what the crowd is doing. Every position is re-evaluated, every day, on its forward-looking merits, with valuation as a core input. When valuation and fundamentals agree with the crowd, we go with it. When they stop agreeing, we start trimming, regardless of how strong the narrative has become. The discipline is not to be contrarian. The discipline is to let the evidence, rather than the noise, make the call.

This does not call the top. What it produces is a portfolio whose biggest positions are there because the numbers justify them, not because everyone else owns them. Over time, that difference compounds quietly, and it shows up on the other side of the mania.

Seven down

This series began with the observation that our biases are hard-wired. Millions of years of evolution optimised us for tribal survival, not for the cold arithmetic of modern markets. Overconfidence helped us hunt. Loss aversion helped us avoid predators. Confirmation bias made us loyal. Herding kept us safe in numbers. None of that goes away when we put on a suit. The brain that carries you to work tomorrow is the same brain that, given the right conditions, will still call the wrong line.

All seven of these sins have been committed, at various times, by every investor worth reading, including us. We commit them every day. The discipline is not in being above them. It is in building a process that catches us before they cost us.

Awareness helps. But it is process that turns awareness into action. Process is what forces us to confront our biases on every decision, rather than only in hindsight. It is not a cure. But it is the best defence we have against a brain that evolved for a very different game.

Thanks for reading the series.

Learn about investing alongside the Plato Investment Management team

This article is part of series of investor letters by the Plato Global Alpha Fund team.

To 31 March, 2026, The Plato Global Alpha Fund has delivered +22.5% p.a. (after fees) since inception (1 September 2021). The Fund is available as an unlisted unit trust or via the Plato Global Alpha Complex ETF (ASX: PGA1).

Click here to learn more about Plato Global Alpha.

Managed Fund

Plato Global Alpha Fund

Global Shares

View

ETF

Plato Global Alpha Complex ETF (PGA1)

Global Shares

View