Herd mentality in investing: why you follow the crowd & how to stop
The single biggest reason retail investors lose money isn't lack of knowledge. It's following the crowd. SEBI data reveals that 91-93% of Indian F&O traders lost money between FY22-FY25. Cumulative losses reached a staggering ₹2.88 trillion during this period.
Globally, the pattern repeats with alarming consistency. Studies show 73-81% of crypto investors lose money. Day trading research consistently shows 97% of traders fail to generate sustainable profits. This isn't coincidence. It's herd mentality systematically destroying wealth across markets and asset classes.
Whether it's the SME IPO frenzy where stocks were oversubscribed 2,000 times before crashing, or investors panic-selling Adani stocks at the bottom only to watch them recover, the psychology remains the same. Following the crowd explains why most investors buy high and sell low, year after year.
For a deeper understanding of the psychological foundations behind this behavior, read our earlier guide on the dangers of herd mentality in stock market investing. Here, we'll focus on recent market examples and actionable strategies to protect your portfolio.
Recent examples show the pattern clearly
GameStop's 2024 resurgence demonstrated social media's power to move billions in market capitalisation. When Keith Gill posted a gaming meme in May 2024, his first content since 2021, GameStop surged 50.6% overnight. Within days, it hit $64.83. By June, Gill's position exceeded $585 million.
Then came the collapse. During his June 7 livestream, the stock crashed 39% in a single day. Investors who bought at the peak saw holdings drop to roughly $21 by late 2024. That's a 68% loss while the company's fundamental business continued deteriorating.
Trump Media became the political meme stock of 2024. Over 621,000 shareholders bought in, the vast majority retail investors, often as political support rather than investment. The stock debuted at $66, peaked near $79, then plummeted to $13.55. That's an 83% decline. Meanwhile, the company posted $400.9 million in losses on just $3.6 million in revenue.
The cryptocurrency landscape tells a similar story. Bitcoin ETF approval in January 2024 attracted over $6.7 billion in net inflows, predominantly from retail investors making average trades of around $13,000. But the meme coin market epitomises herd destruction.
After peaking at $137 billion in September 2024, meme coins crashed to roughly $38-49 billion. That's a 62-72% collapse. Dogecoin fell 65%. Shiba Inu dropped 69-70%. PEPE lost over 80%. The TRUMP meme coin launched in January 2025, peaked at $72, then crashed below $16. That's a 78% decline, with 80% of the supply controlled by insiders who sold to retail buyers at the top.
AI stock mania represents the current frontier of herd behaviour. Nvidia's stock rose 1,220% over three years. Palantir trades at a 400+ P/E ratio, with retail investors on track to buy approximately $8 billion in shares during 2025. Only 3 of 23 Wall Street analysts rate it a "buy."
Super Micro Computer offers a cautionary tale. After joining the S&P 500 in March 2024, riding AI hype, accounting concerns emerged. Ernst & Young resigned as auditor. The stock crashed by over 50%, erasing more than $50 billion in market cap.
Indian markets witnessed spectacular herd behaviour
The SME IPO frenzy became India's most vivid example of retail herd mentality. Average retail applications per SME IPO exploded from 299 in 2015-16 to 213,000 in 2024-25. That's a 700-fold increase. HOAC Foods India was oversubscribed 2,013 times. Kay Cee Energy reached 1,052 times. Shyam Dhani Industries, a ₹38.5 crore IPO, attracted bids worth over ₹25,000 crore.
The aftermath was predictable. Nearly 65% of 2024 SME listings now trade below their issue price. In 2025, 37% of SME IPOs closed below issue price on their very first day. That compares to just 9% the year prior. M.V.K. Agro Food listed at a 30.87% loss and has since fallen 65% from issue price.
SEBI responded with unprecedented tightening. They doubled the minimum application size to ₹2 lakh, effectively eliminating the retail category. Promoter lock-ins extended to 5 years. Listing-day price movements are now capped.
The Adani stock crash following the January 2023 Hindenburg report erased $150 billion in market capitalisation. Over $107 billion vanished within just 10 days. Retail investors who panicked-sold at the bottom locked in maximum losses. Foreign institutional investors systematically reduced exposure over subsequent months.
When SEBI cleared Adani in September 2024, finding no evidence of stock manipulation, most stocks had recovered significantly. The second Hindenburg report in August 2024 caused merely a 3% dip over 10 days. The market had learned from the first panic.
Railway stocks delivered the most dramatic boom-bust cycle. RVNL, IRCON, and RailTel delivered multibagger returns up to 2,100% in 18-24 months. Retail investors drove most of this rally. The 2025 correction erased ₹1.32 lakh crore in investor wealth. RVNL fell 36%. IRCON dropped 31%. Jupiter Wagons lost nearly half its value.
The numbers reveal a devastating pattern
SEBI's official data on F&O trading is stark. Between 91-93% of retail traders lose money. Over four years from FY22-FY25, cumulative losses reached ₹2.88 trillion (approximately $34 billion). The average loss per trader hit ₹1.1 lakh in FY25 alone. Only 1% of individual traders earned profits exceeding ₹1 lakh after costs.
Meanwhile, foreign portfolio investors earned ₹28,000 crore in gross profit. 97% of that came from algorithmic trading, not human decision-making susceptible to herd instincts.
The DALBAR study quantifies the global behaviour gap. In 2024, the average equity investor earned 16.54% while the S&P 500 returned 25.02%. That's an 848 basis point gap, the fourth-largest since 1985. Over 30 years from 1985-2015, the S&P 500 returned 10.35% annually while the average investor earned just 3.66%. That's a 6.69 percentage point annual shortfall driven primarily by emotional buying and selling.
The Bank for International Settlements found that 73-81% of retail Bitcoin investors across 95 countries have likely lost money. Large, sophisticated investors sold before steep price decline,s while smaller investors were still buying. That's the textbook herding pattern.
Recognising when you're following the herd
Several warning signs indicate you may be succumbing to herd mentality. You feel urgency to invest because everyone else is making money. You're buying after major price increases rather than researching beforehand. Your decisions are based on tips, social media buzz, or news headlines rather than fundamental analysis. You experience discomfort when considering a position opposite to market consensus.
Before any investment, ask yourself critical questions. Am I buying because others are buying, or based on my own analysis? Would I be content owning this if I couldn't sell for 10 years? Have I researched the company's fundamentals independently? Does this investment align with my long-term financial goals? What is my exit strategy if my thesis proves wrong?
Market-level red flags also signal herd activity in progress. Howard Marks warns that sold-out investment conferences are a danger sign. When valuations become detached from fundamentals, with P/E ratios reaching 400+ and companies with no earnings commanding billion-dollar market caps, herd behaviour is likely peaking. New paradigm thinking, the belief that traditional valuation metrics no longer apply, typically precedes spectacular collapses.
What investment legends teach us about crowd behaviour
John Templeton articulated the pattern with precision. Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria. The Dot-Com Bubble pushed NASDAQ to 5,048 before a 78% crash wiped out $5 trillion. The 2008 Financial Crisis erased $11 trillion in US household wealth. Japan's 1989 bubble saw the Nikkei reach 38,957 at a P/E of 80x. It didn't recover to that level until February 2024, 35 years later.
Warren Buffett's most famous advice directly addresses herd psychology. Be fearful when others are greedy, and be greedy when others are fearful. He elaborates that you need to divorce your mind from the crowd. The herd mentality causes all these IQs to become paralysed. Smart doesn't always equal rational. Charlie Munger adds that mimicking the herd invites regression to the mean.
Benjamin Graham, Buffett's mentor, observed that even the intelligent investor is likely to need considerable willpower to keep from following the crowd. Howard Marks warns that the very coalescing of popular opinion behind an investment tends to eliminate its profit potential.
JP Morgan Asset Management data reveals why reactive trading destroys wealth. $10,000 invested in the S&P 500 from 2003-2022 grew to approximately $64,844 if fully invested. Missing just the 10 best trading days reduced returns to $29,708. That's a 54% reduction. Missing the 20 best days left only $17,000.
Critically, 7 of the 10 best market days occurred within 15 days of the 10 worst days. The biggest rallies happen during bear markets and periods of extreme volatility. That's precisely when herd selling is most intense.
Herd mentality remains the most reliable mechanism for transferring wealth from retail investors to sophisticated traders. The evidence is overwhelming and consistent across markets, time periods, and asset classes. Following the crowd produces inferior returns, magnifies losses during downturns, and causes systematic buying high and selling low.
The path forward requires self-awareness, independent analysis, and systematic discipline. Recognise the psychological forces pushing you toward the crowd. Conduct genuine research before investing. Use SIPs and predetermined rules to remove emotion from decisions. Diversify globally to reduce exposure to local manias. Think independently. Research thoroughly. Invest systematically. That's the only reliable path to long-term wealth creation.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage companies, and not of Winvesta. We advise investors to check with certified experts before making any investment decisions.
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The single biggest reason retail investors lose money isn't lack of knowledge. It's following the crowd. SEBI data reveals that 91-93% of Indian F&O traders lost money between FY22-FY25. Cumulative losses reached a staggering ₹2.88 trillion during this period.
Globally, the pattern repeats with alarming consistency. Studies show 73-81% of crypto investors lose money. Day trading research consistently shows 97% of traders fail to generate sustainable profits. This isn't coincidence. It's herd mentality systematically destroying wealth across markets and asset classes.
Whether it's the SME IPO frenzy where stocks were oversubscribed 2,000 times before crashing, or investors panic-selling Adani stocks at the bottom only to watch them recover, the psychology remains the same. Following the crowd explains why most investors buy high and sell low, year after year.
For a deeper understanding of the psychological foundations behind this behavior, read our earlier guide on the dangers of herd mentality in stock market investing. Here, we'll focus on recent market examples and actionable strategies to protect your portfolio.
Recent examples show the pattern clearly
GameStop's 2024 resurgence demonstrated social media's power to move billions in market capitalisation. When Keith Gill posted a gaming meme in May 2024, his first content since 2021, GameStop surged 50.6% overnight. Within days, it hit $64.83. By June, Gill's position exceeded $585 million.
Then came the collapse. During his June 7 livestream, the stock crashed 39% in a single day. Investors who bought at the peak saw holdings drop to roughly $21 by late 2024. That's a 68% loss while the company's fundamental business continued deteriorating.
Trump Media became the political meme stock of 2024. Over 621,000 shareholders bought in, the vast majority retail investors, often as political support rather than investment. The stock debuted at $66, peaked near $79, then plummeted to $13.55. That's an 83% decline. Meanwhile, the company posted $400.9 million in losses on just $3.6 million in revenue.
The cryptocurrency landscape tells a similar story. Bitcoin ETF approval in January 2024 attracted over $6.7 billion in net inflows, predominantly from retail investors making average trades of around $13,000. But the meme coin market epitomises herd destruction.
After peaking at $137 billion in September 2024, meme coins crashed to roughly $38-49 billion. That's a 62-72% collapse. Dogecoin fell 65%. Shiba Inu dropped 69-70%. PEPE lost over 80%. The TRUMP meme coin launched in January 2025, peaked at $72, then crashed below $16. That's a 78% decline, with 80% of the supply controlled by insiders who sold to retail buyers at the top.
AI stock mania represents the current frontier of herd behaviour. Nvidia's stock rose 1,220% over three years. Palantir trades at a 400+ P/E ratio, with retail investors on track to buy approximately $8 billion in shares during 2025. Only 3 of 23 Wall Street analysts rate it a "buy."
Super Micro Computer offers a cautionary tale. After joining the S&P 500 in March 2024, riding AI hype, accounting concerns emerged. Ernst & Young resigned as auditor. The stock crashed by over 50%, erasing more than $50 billion in market cap.
Indian markets witnessed spectacular herd behaviour
The SME IPO frenzy became India's most vivid example of retail herd mentality. Average retail applications per SME IPO exploded from 299 in 2015-16 to 213,000 in 2024-25. That's a 700-fold increase. HOAC Foods India was oversubscribed 2,013 times. Kay Cee Energy reached 1,052 times. Shyam Dhani Industries, a ₹38.5 crore IPO, attracted bids worth over ₹25,000 crore.
The aftermath was predictable. Nearly 65% of 2024 SME listings now trade below their issue price. In 2025, 37% of SME IPOs closed below issue price on their very first day. That compares to just 9% the year prior. M.V.K. Agro Food listed at a 30.87% loss and has since fallen 65% from issue price.
SEBI responded with unprecedented tightening. They doubled the minimum application size to ₹2 lakh, effectively eliminating the retail category. Promoter lock-ins extended to 5 years. Listing-day price movements are now capped.
The Adani stock crash following the January 2023 Hindenburg report erased $150 billion in market capitalisation. Over $107 billion vanished within just 10 days. Retail investors who panicked-sold at the bottom locked in maximum losses. Foreign institutional investors systematically reduced exposure over subsequent months.
When SEBI cleared Adani in September 2024, finding no evidence of stock manipulation, most stocks had recovered significantly. The second Hindenburg report in August 2024 caused merely a 3% dip over 10 days. The market had learned from the first panic.
Railway stocks delivered the most dramatic boom-bust cycle. RVNL, IRCON, and RailTel delivered multibagger returns up to 2,100% in 18-24 months. Retail investors drove most of this rally. The 2025 correction erased ₹1.32 lakh crore in investor wealth. RVNL fell 36%. IRCON dropped 31%. Jupiter Wagons lost nearly half its value.
The numbers reveal a devastating pattern
SEBI's official data on F&O trading is stark. Between 91-93% of retail traders lose money. Over four years from FY22-FY25, cumulative losses reached ₹2.88 trillion (approximately $34 billion). The average loss per trader hit ₹1.1 lakh in FY25 alone. Only 1% of individual traders earned profits exceeding ₹1 lakh after costs.
Meanwhile, foreign portfolio investors earned ₹28,000 crore in gross profit. 97% of that came from algorithmic trading, not human decision-making susceptible to herd instincts.
The DALBAR study quantifies the global behaviour gap. In 2024, the average equity investor earned 16.54% while the S&P 500 returned 25.02%. That's an 848 basis point gap, the fourth-largest since 1985. Over 30 years from 1985-2015, the S&P 500 returned 10.35% annually while the average investor earned just 3.66%. That's a 6.69 percentage point annual shortfall driven primarily by emotional buying and selling.
The Bank for International Settlements found that 73-81% of retail Bitcoin investors across 95 countries have likely lost money. Large, sophisticated investors sold before steep price decline,s while smaller investors were still buying. That's the textbook herding pattern.
Recognising when you're following the herd
Several warning signs indicate you may be succumbing to herd mentality. You feel urgency to invest because everyone else is making money. You're buying after major price increases rather than researching beforehand. Your decisions are based on tips, social media buzz, or news headlines rather than fundamental analysis. You experience discomfort when considering a position opposite to market consensus.
Before any investment, ask yourself critical questions. Am I buying because others are buying, or based on my own analysis? Would I be content owning this if I couldn't sell for 10 years? Have I researched the company's fundamentals independently? Does this investment align with my long-term financial goals? What is my exit strategy if my thesis proves wrong?
Market-level red flags also signal herd activity in progress. Howard Marks warns that sold-out investment conferences are a danger sign. When valuations become detached from fundamentals, with P/E ratios reaching 400+ and companies with no earnings commanding billion-dollar market caps, herd behaviour is likely peaking. New paradigm thinking, the belief that traditional valuation metrics no longer apply, typically precedes spectacular collapses.
What investment legends teach us about crowd behaviour
John Templeton articulated the pattern with precision. Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria. The Dot-Com Bubble pushed NASDAQ to 5,048 before a 78% crash wiped out $5 trillion. The 2008 Financial Crisis erased $11 trillion in US household wealth. Japan's 1989 bubble saw the Nikkei reach 38,957 at a P/E of 80x. It didn't recover to that level until February 2024, 35 years later.
Warren Buffett's most famous advice directly addresses herd psychology. Be fearful when others are greedy, and be greedy when others are fearful. He elaborates that you need to divorce your mind from the crowd. The herd mentality causes all these IQs to become paralysed. Smart doesn't always equal rational. Charlie Munger adds that mimicking the herd invites regression to the mean.
Benjamin Graham, Buffett's mentor, observed that even the intelligent investor is likely to need considerable willpower to keep from following the crowd. Howard Marks warns that the very coalescing of popular opinion behind an investment tends to eliminate its profit potential.
JP Morgan Asset Management data reveals why reactive trading destroys wealth. $10,000 invested in the S&P 500 from 2003-2022 grew to approximately $64,844 if fully invested. Missing just the 10 best trading days reduced returns to $29,708. That's a 54% reduction. Missing the 20 best days left only $17,000.
Critically, 7 of the 10 best market days occurred within 15 days of the 10 worst days. The biggest rallies happen during bear markets and periods of extreme volatility. That's precisely when herd selling is most intense.
Herd mentality remains the most reliable mechanism for transferring wealth from retail investors to sophisticated traders. The evidence is overwhelming and consistent across markets, time periods, and asset classes. Following the crowd produces inferior returns, magnifies losses during downturns, and causes systematic buying high and selling low.
The path forward requires self-awareness, independent analysis, and systematic discipline. Recognise the psychological forces pushing you toward the crowd. Conduct genuine research before investing. Use SIPs and predetermined rules to remove emotion from decisions. Diversify globally to reduce exposure to local manias. Think independently. Research thoroughly. Invest systematically. That's the only reliable path to long-term wealth creation.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage companies, and not of Winvesta. We advise investors to check with certified experts before making any investment decisions.
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