Reap the benefits of bucking the trend

Consider this tip from Warren Buffett, one of the wisest (and wealthiest) investors alive today. He says: "I will tell you how to become rich... Be fearful when others are greedy. Be greedy when others are fearful."

In other words, don't follow the crowd and run away screaming when markets plummet - view it as an opportunity.

Indeed, when markets fall as they have been doing of late, selling out rather than buying or holding can prove to be an expensive mistake, according to research by fund manager Fidelity.

Had you invested £1,000 in the FTSE All Share at the start of August 15 years ago, you would have enjoyed a total return of £2,461, it says, so long as you left your cash invested until August this year. But if you missed the market's 10 best days your return would be just £1,332. And if you missed the best 40 days you would have been left with a measly £452.

Such messages make sense to rational individuals; but despite centuries of evolution, investors often appear to be guided by caveman instincts that suggest they will forever struggle to act on such cool-headed advice.

As Charles Mackay, the Scottish journalist and author of Extraordinary Popular Delusions and the Madness of Crowds, published in 1841, also pointed out: "Men...think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

This is why millions of us piled into technology stocks in late 1999, even though prices were riding dangerously high. Investors who lumbered at the back of the herd and bought their tech stocks in December that year faced punishing losses when the dotcom bubble burst. The FTSE 100 (UKX) started to slide from its all-time high of 6930 on 30 December 1999, by more than 13% in April 2000 and finally bottoming at 3287, more than 50% lower, by March 2003.

Successful investing is hindered by such caveman instincts, says Miles Standish, managing director of Fisher Investments, a firm specialising in behavioural finance. He says: "Our brains were hard-wired when we were cavemen, which is why we're instinctively not very good at investing. Our herd instinct developed from hunting as a pack makes us follow the crowd, which is why so many people buy at the top of the market and sell in a panic at the bottom."

Caspar Rock, chief investment officer of multimanager fund group Architas, says: "It's a bit like a small child covering their ears and shouting la la la la. They don't want to hear what's being said. This is what retail investors did in 2008 (following the Lehman Brothers crisis) when they got out of the market and missed the 30 to 40% rebound.

"Then they go the other way - they start to feel they've missed the boat and go in again."

Standish says it is our Stone Age battle for survival that has trained us to hate losses more than we love gains. "Emotionally, a stockmarket fall of 15% is the equivalent of a market going up more than 50%. Back then, when we were cavemen, it was more important to avoid injury and go hungry than to make a gain, such as killing an antelope," he says.

Regular investing is one way to overcome the negative impact of caveman instincts. It means investors end up buying more stock for their money when prices are down, although the drawback is that gains will also be less in a rising market than if they had committed a large lump sum at the outset.

Tom Stevenson, investment director of Fidelity, says: "Drip-feeding money enables you to buy even when the market feels unpleasant. And you don't have to think about it - when we allow ourselves to think about every investment action we take, we do the wrong thing. If you don't sell your shares [in a falling market] the paper loss is irrelevant, and often the market will bounce back as it did in 2008/2009."

For more on drip-feeding the market, read:Avoid risks of market volatility with pound-cost averaging.

Investors are currently facing plenty of unnerving threats, including the continuing saga surrounding eurozone debt, the US deficit, rising inflation and events such as the Arab Spring.

But as Stevenson says: "There's also risk in not being in the market. Keep your money in cash and inflation eats away at it and being out of the market you ignore the outperformance over time."

Indeed, Rob Morgan, investment analyst at broker Hargreaves Lansdown, says there are plenty of bold investors out there committing lump sums. "Many are sitting up and taking notice, particularly of the high dividend yields available on the likes of Vodafone and pharmaceuticals.

So long as they don't get upset by seeing their capital fluctuate they can enjoy the dividends, which currently account for a huge amount of value in the market."

See what Jeremy Batstone-Carr of Charles Stanley has to say about defensive stocks in:Investing in pharmaceuticals.

Daniel Read, professor of behavioural science at Warwick Business School, observes that most investors are hampered by an innate need to look for patterns in the world around them.

He illustrates this with an example: "Suppose I roll a six-sided die in front of someone 100 times and ask them what will happen next. They will look at the last series of rolls and predict what will happen next, when in reality they simply have a one-in-six chance of guessing the right number," he says. "It's just as it was when cavemen looked for patterns in the stars."

The contrarian investor

Neil Woodford, who manages around £20 billion in the Invesco Perpetual Income and High Income unit trusts, knows a thing or two about going against the crowd. He read the markets correctly in the late 1990s, steering clear of tech stocks in preference for traditional defensive shares such as tobacco and pharmaceuticals.

In 1999, the FTSE 100 roared up 20.6% over the year, while he trailed with a rise of just 10% for the High Income fund, according to figures from Hargreaves Lansdown.

But at the end of 2000, nine months after the worldwide bubble burst in March 2000 (when the US Nasdaq index, dominated by technology shares, topped out and fell sharply), the fund was boasting returns of 16.9%, while the FTSE 100 (UKX) was down 10.9%. Over the three years to January 2003, his fund rose a more modest 7.8%, compared to a near 38% fall in the FTSE.

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