Summary of Key Points
This article discusses the "herd mentality" in the stock market, raising four main questions: How long can such a trend last? Is there anything special about this particular instance? Who is quietly suffering losses while others are making money? And how can we determine whether the market is currently in a state of herd mentality? The article also suggests using Python-based quantitative indicators to monitor these trends on a monthly or daily basis, to help ordinary investors understand and navigate this market phenomenon.
Breakdown and Explanation
1. Understanding What "Herd Mentality" Is and Why It's Always a Topic of Discussion
Simply put, herd mentality occurs when institutions and large investors cluster their purchases on a few specific stocks or industries, causing those stocks to rise significantly more than others. Examples from previous years include the liquor and renewable energy sectors, as well as the recent AI sector. Why is this a concern? Because the contrast during a herd mentality is stark: those who bet on the right stocks make huge profits, while those who missed out see their less popular stocks remain stagnant or even decline. This stark difference makes everyone want to understand whether they should join in and whether they might suffer losses if they do.
2. How Long Can a Herd Mentality Last? Is This Time Really Different?
The duration of a herd mentality depends on three key factors:
- The solidity of the reason for the clustering: If there is a real long-term growth opportunity in the industry (such as the carbon neutrality policies for renewable energy or the technological revolution in AI), the trend can last longer. If it's just short-term speculation (e.g., a sudden surge in a concept without actual performance), it will likely end quickly.
- Availability of funds: Whether new investors are entering the market to buy into the stocks. If institutions continue to add to their positions, the trend will continue; if funds start to withdraw, the market will correct.
- Policy changes: For example, whether regulations will limit the excessive concentration of shares held by institutions. If there is policy intervention, the herd mentality may end prematurely.
Is this time really different? There might be two differences: First, the industry driving the trend is different (AI is a new technology, unlike previous sectors like consumer goods or renewable energy). Second, the composition of investors has changed (with more quantitative funds and foreign capital participating, potentially accelerating the trend). However, the fundamental principle of concentrated funds remains, so the market will eventually adjust after a significant increase—similar to what happened with the liquor and renewable energy sectors.
3. Everyone Says Everyone Is Making Money During a Herd Mentality, but Who Is Really Losing?
Herd mentality doesn't mean everyone profits. There are always those who lose:
- Retail investors who didn't participate in the clustering: They buy stocks in smaller companies or less popular industries, and see their stocks remain stagnant or decline while the popular ones rise. For example, during the liquor herd mentality in 2021, investors in small manufacturing companies suffered losses.
- Those who buy in at high prices: They enter the market after the trend has already started, only to encounter a market correction shortly after. For instance, during the 2022 renewable energy correction, many investors who bought in at high prices got stuck.
- Leveraged investors: Those who use debt to buy into popular stocks can lose more than their principal if the market turns around, facing significant risks.
4. How to Determine If the Market Is in a Herd Mentality? What Are the Quantitative Indicators?
You don't need complex formulas; two simple ratios can help:
- Monthly indicators: Calculate the proportion of trading volume of the top 50/100 hottest stocks in the market over a month. If this proportion exceeds 30% (e.g., the top 100 stocks account for half of the total market volume), it indicates a herd mentality.
- Daily indicators: Check the same ratio daily. A sudden spike in this ratio (e.g., from 20% to 40%) suggests that everyone is focusing on the popular stocks that day.
- Python-based quantification: Use code to automatically calculate these ratios, which are updated daily, providing real-time insights into the market's herd mentality. For example, you can write a script to retrieve the trading volume of the top 100 stocks and divide it by the total market volume to determine the degree of herd mentality for that day.
5. What Should Ordinary Investors Do in the Face of a Herd Mentality?
- Don't chase highs blindly: Popular stocks may rise sharply, but they also carry higher risks, and buying at the peak can lead to significant losses.
- Diversify your investments: Don't put all your money into the same sector; spread it across different industries (e.g., consumer goods, pharmaceuticals, technology) to reduce risk.
- Focus on what you understand: If you don't understand a particular sector (like AI), don't force yourself to buy related stocks. Choose industries you are familiar with, such as consumer goods companies.
- Use indicators as a guide: If quantitative indicators show a high degree of herd mentality (e.g., over 40%), be cautious of potential market corrections and avoid further investment.
In summary, herd mentality is neither a myth nor a trap—it's simply a result of concentrated market activity. Ordinary investors should understand the patterns, avoid following the crowd, and stick to their area of expertise.