Lemming

What Is a Lemming in Investing ?

"Lemming" is a criticizing term for an investor who displays herd mentality and contributes without doing their own research, which frequently prompts losses.

Grasping the Term "Lemming"

As indicated by urban legend, lemmings are small rodents known for having impulses that make them, intermittently, charge all at once off precipices, with the final product being their death. Figuratively talking, a lemming, in financial markets speech, alludes to an effortlessly influenced by the investor irrationality of market price action that is inclined to happen at the extremes, and bounces in for fear of missing out on, what they erroneously accept, is a golden opportunity.

This "herd mentality," commonly, builds the chance of losing money, since investors either leave the market too early or get into it too late when prices are too high to create a gain. To counter the "herd mentality," numerous [sophisticated investors](/sophisticatedinvestor, for example, contrarian traders, respond in a contrary way when they sense that market movement is due to the flood of lemmings. For instance, in the event that investors are in a buying furor, contrarians will sell and when lemmings sell, these investors will buy all things being equal.

To keep from turning into a lemming investor, one needs to keep their feelings taken care of. At the end of the day, separate from the analysis that is critical to putting a trade. An investor that is effective in doing this can, spot lemming activity and consider taking advantage of it for gains by moving in a contrarian fashion.

Directing the important due diligence, or taking on a similar mindset as a contrarian, is a greatly improved strategy than capitulating to a lemming mentality, particularly when irrational exuberance appears to have grasped the market. Extreme positive thinking frequently harmonizes with market tops and extreme cynicism is very apparent at market bottoms. The undeniable point is that these market extremes must be verifiably distinguished sometime later. All in all, with the lucidity that main accompanies hindsight.

Adroit investors know that an opportunity to sell is when prices are a lot higher than fundamentals recommend and that an opportunity to buy is the point at which the prices are a lot of lower than is sensibly justified. Extreme idealism ought to be seen in a bearish vein and extreme cynicism ought to be considered bullish, which is something contrary to the manner in which a lemming thinks.

Studies have found that investors are most affected by recent developments — market news, political occasions, earnings, and so forth — and disregard long-term investment and economic fundamentals. Besides, in the event that a movement begins in a single heading, it will in general get an ever increasing number of investors with time and momentum. The impact of such lemming-like behavior has been exacerbated in recent years due to an overflow of sentimentalist financial, economic, and other news that besieges the sensibilities of investors. This multiplication of financial media unavoidably influences investor psychology and brings forth lemmings.

Strategies to Avoid Becoming a Lemming

Stick to a plan.
Know your objectives.
Pick a strategy that lines up with your objectives.
Limit your risk.
Try not to capitulate to greed or fear.
Grasp your investing character.
Remain inside your investing comfort zone.
Stick to your investment approach.
Try not to get sucked into the promotion of "financial pornography" media, exposure, and advertising.

Highlights

"Lemming" is a stigmatizing term for an investor who displays herd mentality and contributes without doing their own research, which frequently prompts losses.
Directing the essential due diligence, or taking on a similar mindset as a contrarian, is a vastly improved strategy than surrendering to a lemming mentality, particularly when irrational exuberance appears to have grasped the market.
As per urban legend, lemmings are small rodents known for having senses that make them, intermittently, charge altogether off bluffs, with the outcome being their death.