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The Bandwagon Effect

The Bandwagon Effect

21 Nov 2019

In 1848 a famous and popular American circus clown of the time – Dan Rice - used a musical bandwagon to grab audience attention for his appearances at political rallies. In this way, he successfully campaigned for Zachary Taylor, who became the twelfth president of the United States in 1849.

Other politicians envied his success in drawing a crowd and strove for a seat on Dan’s bandwagon (pictured): the phrase "jump on the bandwagon" was born.

We’ve all seen people jumping on the investment bandwagon, frequently to devastating effect. Those of a certain age will recall the Poseidon bandwagon of the late 1960s.

In September 1969, the mining company Poseidon NL made a major nickel discovery at Windarra in Western Australia. In early September their shares had been trading at $0.80, but as information about the discovery was released, the price rose until it was trading at $12.30 on October 1.

The price rise was largely due to high demand during the war in Vietnam, exacerbated by a shortage due to industrial action at a main supplier in Canada.

But ‘word got around’ and both professional investors and the man in the street sought to jump on the Poseidon bandwagon.

When Poseidon’s share price shot skywards, it became unaffordable for many, who then sought out other miners near Windarra. The bandwagon grew as increasing numbers of investors poured in. Those on the bandwagon caused a bubble, with Poseidon’s shares peaking at $280 in February 1970.

Key Points

The death spiral ended when the company was delisted in 1976.

Conformity Is Not Always Good for You

Dan Rice and the original bandwagon

With the benefit of hindsight, many people are smart, declaring they’d never fall for such a situation like that. But generations forget – and, though history never repeats precisely, it does tend to rhyme.

Witness the current crypto currency story. Valued at next to nothing at their inception, these ‘currencies’ attracted many who ‘wanted in’ on the action; many who had ‘heard from a reliable source’ that here was a great opportunity. Result? Another bandwagon. Another bubble. And, for many, a loss of wealth.

So, what’s the antidote? Actually, it’s pretty simple. First, good investing habits and bandwagons don’t mix. Second, if people are spruiking something as too good to be true, it is. Third, lock onto people who have investment experience and who ignore bandwagons altogether. Good investing is boringly pragmatic and welcomingly satisfying.

And, as famous investor Sir James Goldsmith wryly observed: If you can see the bandwagon … you’ve missed it.

Disclaimer & General Advice Warning

This publication has been prepared by Joseph Palmer & Sons (ABN 29 548 490 818) an Australian Financial Services Licensee (AFSL 247067). Whilst the information contained in this publication has been prepared with all reasonable care from sources, which Joseph Palmer & Sons believes are reliable, no responsibility or liability is accepted by Joseph Palmer & Sons for any errors or omissions or misstatements however caused. Any opinions, forecasts or recommendations reflects the judgment and assumptions of Joseph Palmer & Sons as at the date of publication and may change without notice. Joseph Palmer & Sons, their officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. This publication is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Any securities recommendation contained in this publication is unsolicited general information only. Joseph Palmer & Sons are not aware that any recipient intends to rely on this publication and are not aware of the manner in which a recipient intends to use it. In preparing our information, it is not possible to take into consideration the investment objectives, financial situation or particular needs of any individual recipient. Investors must obtain individual financial advice from their investment advisor to determine whether recommendations contained in this publication are appropriate to their personal investment objectives, financial situation or particular needs before acting on any such recommendations.

Author: Eddie Lees

Categories: Palmer Articles, Special Insights

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