Electronic Herds and their behavior

Now a day, everything in the market is online. This gives extra advantage to the investors around the world to invest in a place where they like to do. An investor in America can buy shares in Indian markets and similarly an Indian investor can invest in American markets. That is how things are in today’s world. This gives the investors the ease to invest in any markets of their choice. The treaties between the governments and the world becoming smaller day by day everything is possible in today’s world.

Raj had commented in one of my article that, “In fact, all of the statistical models for prediction would be perfect EXCEPT that there is a monkey wrench thrown in and that is human emotions associated with investing. As soon as you bring that in, no analyst in the world can predict anything accurately.” It is not good to invest with emotions but that is how the investors’ invest. They invest with emotions and then pray for the shares to rise. Now that the electronic herd is also present, these emotions play a dominant role.

The investors from other nations don’t know or care to know the exact situation of the market they invest in. For example, assume that an American investor say Sam invests in India. At the same time, Elections happen in India and a new government is formed at centre. At this hour, an Indian friend of Sam advices him to take care of the investments made in India as the new party at the centre is not so very investor friendly. This sounds like an alert to Sam. He would have read about the government and all that but when an Indian says something he will think about it no matter however sure he is. At the same time he sees the market rising, as he is not sure about the state, he will wait to book the profit and if the markets start to fall then Sam will exit the market as soon as possible booking whatever profits he can.

Now that Sam is warned by his friend, he will surely tell his friends about the same. So the electronic herd starts thinking as to what to do next? Then Sam suggests the crowd to exit the market as the government is not so very investor friendly and they might start charging more and start eating up their profits. When this herd decides they start selling the shares and booking profit and exiting the market. When they start to exit, the market starts to fall as these herds does not care much about their profit as they want to get out ASAP.

Electronic herds feel good about exiting the market as the markets have tumbled down. They don’t realize that it is because of them the market is down. Let me elaborate, when the electronic herd starts to sell, the people who are buying will not have so much confidence on the shares and they will be wondering as to why these shares are sold at such prices. The buyers become weary and start asking for lesser value and this in turn affects the markets. It is not that the markets are efficient or not. It is about the confidence of investors who decide the fate of the markets. Since the electronic herd carried huge pile of money their confidence is much more important in all local markets than the local guys in the markets.

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