Herd mentality is prevalent among institutional money managers especially in the mutual fund industry. Investors like to hold what everyone else is holding because it’s the safest thing to do for their jobs. After all, why stick out your neck for a stock that might or might not pan out. A bad stock pick may get you fired from this “competitive” industry. Another reason why people like to own stocks that are popular because it provides a social safety net.
Misunderstanding risk, people feel more comfortable with unknown unknowns than known unknowns. Reread that statement again and think about it.
A stock with problems is unattractive, too many problems plague this company for investors to feel excited about it’s prospects. Since the company’s problems are well known, it’s also sold down very heavily by mutual finds that can’t afford to let investors see that they held such an underperforming bad stock.
Everyone would rather hold the high flying stock than the trouble plagued stock.
Would you rather own : Apple Computers or Research in Motion
Would you rather invest in the emerging biotech industry or the tobacco industry?
