Mom’s Question

When I was a boy, I heard mom say this more than once: ““If all of your friends jumped off a bridge, would you do it too?” This is known as a bandwagon way of making decisions and living life. Perhaps this happens there is something that looks attractive and that is attracting growing support. People are said to be “jumping on the bandwagon.” This may sometimes be good, but oftentimes it reveals a lack of careful thinking, devoid of wisdom and followed by jumping on the bandwagon.

“The bandwagon fallacy is based on the assumption that the majority’s opinion is always valid. This has a peer pressure component to it, as it argues that if everyone else believes something, you should too.” – SOURCE: Develop Good Habits

Five things Bandwagon Bridge-jumping Investors Do

Because I have had the opportunity to work with many individuals and couples, I have been able to observe five things that are “normal” for most of the people I help. They all have a common set of behaviors. I cannot recommend any of the following five. If you are doing even one of them, then I suggest that you are in a bandwagon that isn’t traveling down the most prudent road.

1. They fail to review their monthly statement. I see this all the time. Statements are ignored. The assumption is that “my broker/advisor is a professional and knows what he/she is doing.” I can tell you that you may be right, but far too often you will discover that there are problems you will see if you look carefully and seek advice from resources that don’t demand quarterly or annual payments.

2. They don’t evaluate the costs: the number of dollars they give their mutual fund, their advisor and broker. I cannot tell you the number of times I have asked this question of someone who comes to me for help: “Are you getting $5,000 of value from your financial advisor?” Sometimes it is even more than that, but I have never heard someway say “Absolutely.” They think an expert deserves to be paid handsomely. Ask a follow-up question: if the advisor set you up appropriately, why do you need to keep paying them for doing almost nothing for the next 20-50 years? Multiply $5K by twenty and now answer the question: “Are you getting what you paid for?”

3. They buy high and rarely buy low. They sell low. There is a herd mentality at work in the market. When the market is euphoric, everyone is following the herd. When the market turns bearish, guess what the herd does. Yes, they abandon ship unless their advisor cautions them to do nothing. Sadly, even when told to stay the course, many bail at the wrong time, That is called buying high and selling low.

4. They don’t pay attention to earnings dates and reports. One thing that a prudent investor does is to monitor their investments for healthy indicators. This is not limited to just stocks, but applies to ETFs and mutual funds as well. I watch earnings reports. This coming week I will be watching the earnings for three of our investments: Coca Cola, Microsoft, and Amazon. Here is an image I captured from the weekly email I receive from Stock Rover.

5. They rarely use a credible resource to avoid poor investments and find good ones. The problem with the “expert” is that they often have something to sell. Even on Seeking Alpha there are three ratings: One is the QUANT rating. It is true that I pay for that element by subscribing to Seeking Alpha. A second rating is the view of Seeking Alpha Analysts. This is often a good gut check for the quality of an investment. The least valuable rating is the one provided by “Wall Street Analysts.”

Wall Street Analyst Recommendations Explained

“Wall Street analyst recommendations are ratings issued by research analysts at sell-side financial institutions — investment banks, brokerages, and independent research firms — assessing whether a stock is likely to outperform, underperform, or perform in line with the market. These typically fall into categories such as Strong Buy, Buy, Hold, Sell, and Strong Sell, often accompanied by a price target.” – Seeking Alpha

How the ratings are obtained: Analysts at brokerages and banks (e.g., Bank of America, Wells Fargo, Baird, Wedbush) conduct independent research on a company, including financial statement analysis, industry trends, management guidance, and competitive positioning. Ratings are frequently revised around key catalysts like earnings reports, guidance updates, or major company events.

Bandwagons and Eternity

When it comes to investing, the bandwagon may have limited, but perhaps life-long implications. When it comes to eternity, then the bandwagon is the wrong ride. You don’t want to ride the bandwagon that leads to destruction.

Jesus said, “Enter by the narrow gate. For the gate is wide and the way is easy[a] that leads to destruction, and those who enter by it are many. For the gate is narrow and the way is hard that leads to life, and those who find it are few.” – Matthew 7:13-14

Paul told the church in Rome that being conformed is not usually going to discernment of God’s will. He said, “Do not be conformed to this world, but be transformed by the renewal of your mind, that by testing you may discern what is the will of God, what is good and acceptable and perfect.” – Romans 12:2

All scripture passages are from the English Standard Version except as otherwise noted.

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