From The Investing Archives: The Danger Of The Herd Instinct

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A famous person once said that wealthy people are no different than you and I; they only have more money.

This famous line certainly rang true when I read a news blurb in Marketwatch titled “Goldman hedge fund reportedly hit hard.” After Bear Stearns’ disaster hedge fund collapse, it appears that Goldman Sachs is next on list. Its $8 billion Global Alpha fund has fallen 26% this year and almost 40% since July 31, 2006.

To be fair, that fund surged some 40% in 2005, for which Goldman was paid $700 million. Nevertheless, the reality is that times have changed and the chances are great this fund will suffer further especially if it has a large exposure to subprime securities.

The other factor that could contribute greatly to its potential demise is the “herd instinct” of the investor. As I mentioned before, once the trust is broken, even wealthy people get tired of losing money and will want to cash out. Once that becomes public knowledge, there will be a long line of people wanting access to their money. Especially those who also had holdings in the collapsed Bear Stearns funds.

Surprisingly, Goldman Sachs has said that there was an August 15 deadline for investors who want out.

What the article did not say is how much the investors would receive. I don’t have that insight nor does it really matter.

My point is that as an investor, you need to cut your losses even in a hedge fund. Yes, 26% is a lot to lose, although you may be still ahead with previous years gains However, it certainly is far better to take that loss than going down with the sinking ship and ending up with nothing but a “thank you for your business” letter.

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