In 2005, over 400 sheep jumped to their deaths.
One sheep walked off a cliff for no reason. A second sheep followed. Shocked shepherds would watch as another 1,500 jumped.
Hundreds of sheep perished, as they got caught up in herd mentality.
Each followed and jumped simply because every other sheep was doing it.
And as uncommon as this may sound, it’s not. In fact, this very same thing happens each and every day among traders and investors.
We buy because everyone else does. We sell because every one else does.
And if every one else is doing it, it must be right. Right?
Well, not exactly…
In 2009, Kiplinger’s ran an article by Robert Frick, titled, “Don’t Trust the Crowd.”
“What's scary about the herd mentality is how insidiously it gets you to see things differently. In fact, a recent experiment showed that we may actually be hard-wired to believe what the crowd tells us. In the experiment, conducted at Emory University, participants were asked to look at an object (an assemblage of cubes) and then judge how it would look if it were rotated slightly. But there was a twist: Other participants--who in reality were actors hired for the experiment--were instructed to give wrong answers in an attempt to sway the opinions of their fellow participants.”
“Sure enough, the real subjects, influenced by the actors, gave incorrect responses, despite what their own eyes told them. Brain scans found that participants didn't just decide to go along with the crowd. Instead, the crowd's opinion actually changed their perception of the problem. Participants "saw" the objects differently. The herd, it seems, alters our perception of reality.”
Many never question what they’re really buying or selling, which can be quite costly.
In the summer of 2016, shares of Fate Therapeutics (FATE) plummeted from $8 a share to less than $2.
That sell-off turned out to be a fantastic buying opportunity, and The Cheap Investor recommended the stock at $1.66 in the August 2016 issue.
This month, Fate Therapeutics hit a new high of $14.45 for a potential return of 771%.
Positive news on a couple of its products and the expansion of a licensing agreement with Memorial Sloan Kettering Cancer Center (MSK) caused the stock to soar. The licensing agreement expansion allows Fate Therapeutics access to additional intellectual property from MSK that enables the development of gene-edited T-cell immunotherapies.
Contributing to the soaring price was the company’s news that a patient was treated in a Phase I study combining FATE-NK100 with either Herceptin or Erbitux (both monoclonal anti-body chemotherapies used in cancer treatment) to treat advanced solid tumors.
While it’s still too early to judge the potential success of the drug combination, analysts believe it holds significant promise in treating cancer.
While others chose to ignore Fate Therapeutics, The Cheap Investor saw the potential, and our subscribers are smiling all the way to the bank.
When the herd overreacts, that’s where opportunity can often be found.