There was a herd of exhausted reindeer who were in desperate search of food. They had limited amount of time and energy to spend.
In that herd of reindeer, some of them were very clear about the path they wanted to pursue as they could see few amounts of leaves to eat nearby. So, most of them diverted to that path and secured the food which was enough to reduce their hunger for few days. Each could have limited food as big crowd of reindeer were sharing it. Very few of them chose to go far for the amount of food enough to satisfy themselves for many days. They went so far as they knew they would have a large amount of food to be shared by a limited number of reindeer. Some of them were still wondering what to do as they were lazy enough not go anywhere and started eating partly dried grass very adjacent to them.
While so, some of them found a good amount of leaves and that too at a very near distance. So, more and more reindeer got to know about the path and quickly grabbed the opportunity. As reindeer were going they were informing others about the food available nearby. Though the amount of food was abundant, the rush of lots of reindeer made the amount limited for each. Still, lots of reindeer were rushing quickly to grab food as they were very hungry and desperate but not willing to search on own or go far. When around 90% of reindeer of entire herd followed the same path the food got exhausted. The late reindeer who chose the path just because they saw others enjoying food, couldn't get anything for themselves. The reindeer who went far to search food on own could find leaves after struggle but they enjoyed it for a longer period of time.
Consider the herd of reindeer as people. Just like them, we choose our path for a living or in the world of investing.
During early 16th century, in Dutch province, a flower named Tulip had become so popular and demanding that everyone got into the business of flower trading as prices of flowers were rising abnormally. At a certain stage, the price of tulip bulb had become ten times more than annual income of skilled craftsman. When it collapsed, it washed away the entire fortune of people who chose to grab the easy opportunity to make money.
During the years of 2000, people were making a huge amount of money by betting on shares of companies related to the internet. This created the hype too high that it couldn’t sustain and collapsed very hard. There are lots of such bubble incidents happened in past due to herd behavior and easy money making opportunities.
In today’s era, we can find tiny bubbles in different sectors where mania of people has created artificial hype to push the prices above the intrinsic value. The world of investment is the classic example of herd behavior where a company which performs better in past tend to show overpriced valuations because of over-optimism. Stock market witness this kind of reactions frequently.
The hard thing for late joiners is to find out whether there is still time left to grab the opportunity by following the herd or to stay away from it. Even if you have pioneered the new way to profit out, with the time passes, it going to be well explored. Generally, a plethora of people chase certain thing when it is perceived less risky and an easy way to make fortune. If it would have been perceived more risky and hard, then the path would have been less traveled.
Some of the economists found herd behavior as the normal reaction of a human being. When people follow others blindly, they behave irrationally without realizing that the past may not reflect in future. Kitchin described it beautifully by inventory example. When demand of certain things rise, companies invest more and produce more to meet demand. When demand gets satisfied to a greater extent and supply keep rising, the value of that thing reduce drastically. As market become competitive and profit margin fades, companies again trim down the supply and gradually it brings demand again.
Warren Buffett once quoted correctly, “Be fearful when others are greedy and greedy when others are fearful”. Nobody knows the stock market better than him and he knows that investors behave irrationally while reacting to changes. That’s the reason he goes against the flow most of the time and succeeds.