§ 01
| Phase | Herd Behavior | Rational Response |
|---|---|---|
| Bubble forming | Buy because everyone else is buying — FOMO | Evaluate whether price is justified by fundamentals |
| Peak euphoria | ‘This time is different’ — ignore all warnings | When taxi drivers give stock tips, be cautious |
| Panic selling | Sell because everyone else is selling | Is anything fundamentally wrong, or is this just sentiment? |
| Capitulation | Sell at the bottom out of despair | The best buying opportunities emerge when others capitulate |
§ 02
Buffett’s famous advice — ‘Be fearful when others are greedy and greedy when others are fearful’ — is the direct antidote to herd behavior. The difficulty is that acting contrary to the crowd feels deeply uncomfortable.
§ 03
Check market sentiment indicators (VIX, put/call ratio, AAII sentiment survey). When sentiment is at extremes, the herd is usually wrong about what comes next.
§ 04
A stock you’ve never heard of is up 300% in a month. Reddit and Twitter are euphoric. Your friends are buying. What should you do?
§ 05
Five questions · AI feedback
Sit with the ideas.
March 2020: S&P 500 falls 34% in 23 trading days, the VIX hits 82, and bearish AAII sentiment reaches 52%. Buying at the bottom returned 70%+ over the next 12 months. What stopped most investors from buying?
Why: