Groupthink

Groupthink is a psychological phenomenon that occurs within a group of people in which the desire for harmony or conformity results in an irrational or dysfunctional decision-making outcome. Coined by the social psychologist Irving Janis, it describes a situation where individual creativity, uniqueness, and independent thinking are lost to the pursuit of consensus. In the world of investing, it’s a silent portfolio killer. When an investment committee, a group of friends, or even the entire market falls into this trap, members suppress dissenting viewpoints to avoid conflict. This creates an illusion of unanimity and invulnerability, leading the group to ignore obvious red flags and make disastrous financial choices. The pressure to conform overrides the logical analysis of alternatives, often fueled by a charismatic leader or a prevailing market narrative that seems too good to question.

In finance, groupthink is the enemy of alpha and the best friend of asset bubbles. It’s the invisible force that convinces a room full of smart analysts that a company with no earnings is worth billions, or that housing prices can never go down. It thrives in environments where everyone reads the same research, listens to the same pundits, and is measured against the same benchmarks.

Why do investors fall for it? Because consensus feels safe. Straying from the herd is psychologically taxing; it’s much easier to buy what everyone else is buying. This behavior, known as Herding, is often driven by a powerful FOMO (Fear Of Missing Out). When a stock or asset class is soaring, the pressure to join the party is immense. The group provides validation, making a speculative bet feel like a prudent decision. This collective belief can become a self-fulfilling prophecy for a time, pushing prices far beyond their Intrinsic Value. The problem is, gravity always wins. When the narrative breaks, the stampede for the exits is just as powerful, leaving the consensus-followers with heavy losses.

Be on the lookout for these warning signs, whether in your investment club, on a financial news show, or in your own thought process:

• Unquestioned Belief: The group shares an illusion of invulnerability. The prevailing investment idea is seen as obviously correct and morally right, breeding excessive optimism. Phrases like “It's a no-brainer” or “You can't lose money on this” are common.
• Rationalizing Warnings: The group actively discounts and explains away any negative information or warnings that might challenge their assumptions. Bad news is either ignored or spun into a positive.
• Pressure on Dissenters: Members apply direct pressure to anyone who expresses doubts or questions the group’s consensus. Sceptics are often branded as “not being team players,” “too negative,” or “just not getting it.”
• Self-Censorship: Individuals decide to keep their doubts and counterarguments to themselves to avoid rocking the boat. Silence is almost always interpreted as agreement.
• Illusion of Unanimity: The perceived consensus is so strong that it feels unanimous. This false unanimity makes the decision seem even more correct and validated.

The core philosophy of Value Investing is the perfect antidote to groupthink. It forces you to build your case from the ground up, based on facts and independent analysis, rather than popular opinion.

Escaping the pull of the crowd requires conscious effort and a robust framework. A true value investor embraces being a contrarian, understanding that the best opportunities are often found in assets the crowd has discarded or overlooked.

1. Do Your Own Work: Never take someone else's word for it. Perform your own Due Diligence. Read the annual reports, understand the business model, and build your own Investment Thesis. Your conviction must come from your own research, not from a TV analyst or a hot tip.
2. Appoint a Devil's Advocate: If you invest as part of a group, formally assign someone the role of arguing against a proposed investment. Their job is to poke holes in the bull case and force the group to confront potential risks.
3. Quantify Your Thesis: Base your decisions on Valuation metrics, not narratives. Ask, “At what price is this stock a bargain?” This anchors your decision in numbers, which are much harder to manipulate than stories.
4. Welcome Dissent: Create an environment where all viewpoints, especially critical ones, are encouraged and debated respectfully. The goal isn't to agree; it's to arrive at the best possible decision.

The late 1990s tech bubble is a classic example of investment groupthink on a global scale. The consensus narrative was “this time it's different.” Old valuation metrics were deemed obsolete for the “new economy.” Analysts who dared to question the sky-high valuations of profitless dot-com companies were ridiculed. Meanwhile, legendary value investors like Warren Buffett were mocked for “losing their touch” because they refused to buy into the mania. The groupthink was that eyeballs and clicks were more important than profits and Cash Flow. When the bubble burst in 2000-2002, the Nasdaq crashed by nearly 80%, wiping out trillions in market value. Those who had done their own work and stuck to timeless principles of value investing were not only safe but had the cash to buy wonderful businesses at bargain prices from the consensus-followers.