Do you remember in school when it always felt better to be in trouble alongside a friend but so damning to be in the same amount of trouble on your own? Or perhaps when that top knot hairstyle felt a bit too ‘out there’ until everybody else started doing it?
Evolution tells us that humans feel more comfortable making a decision when others around them have also made this decision. It is the need to ‘fit in’, so our emotions align with something greater than ourselves: the group. The psychology aficionados among us call this ‘mirror neurons’.
But surely we would deviate from following fads when it comes to such important parts of life like investment decisions, right?
In fact, it is just as pronounced.
If we look at the four primary stages of a property cycle: stagnation, upturn, boom and correction (see below); we know that the vast majority of investments are made during the boom. In fact, these high sales volumes are exactly what causes the boom to occur.
As more and more people join the herd, the demand for property in that market exceeds supply and people pay more and more for the property they want until they are no longer able to, through their own finances or through the intervention of third parties (banks, regulators, government, etc.)
We have seen this recently in Sydney, where public sentiment prior to the boom was that Sydney property would never represent a viable investment again. Then as the boom grew in magnitude, investors refused to purchase anywhere other than Sydney. Even if this meant that their strategy would be put back years.
Whether someone is willing to admit it or not, the challenge of being the ‘black sheep’ is that it can be scary and uncomfortable. The great way to use discomfort to our advantage is to remember that growth exists outside your comfort zone.
