Investor psychology

Some great insights into part of the Psychology that dictates how we trade, invest and manage money – remember fund managers who manage $billions act like this too. You know my views on counting Elliott Waves, I don’t tend to do it unless they are very very clear.

Witness the Epic Battle Between Investor Hope and Investor Fear Collective investor psychology: an insight from the long forgotten Mr. Gates July 16, 2012

By Elliott Wave International

Can an investor ever know enough about financial markets to make a truly informed decision?

Even professionals must cope with imperfect knowledge, and the constant uncertainty that comes with it. That’s why every investor looks to others for signals about what to do.

Have you ever watched a dog interact with its owner? The dog repeatedly looks at the owner, taking cues constantly. The owner is the leader, and the dog is a pack animal alert for every cue of what the owner wants it to do.

Participants in the stock market are doing something similar. They constantly watch their fellows, alert for every clue of what they will do next. The difference is that there is no leader. The crowd is the perceived leader, but it comprises nothing but followers. When there is no leader to set the course, the herd cues only off itself, making the mood of the herd the only factor directing its actions.

The Elliott Wave Theorist, May 2009

Around the turn of the last century, Elmer Gates also observed how people take cues from others. He once ran the largest private non-commercial laboratory in the United States and obtained more invention patents than Thomas Edison. Remarkably, he worked on his inventions only during his spare time. His regular working hours were devoted to the study of the mind. Gates noted:

A companion, helper, associate, co-worker, influences one’s mental functioning by every gesture, tone, look, suggestion, opinion, approval or disapproval, argument, and mood. Minds interact consciously and subconsciously especially during quiescence, dirigation, introspection, and awareness; by their congeniality, presence and other ways.

Elmer Gates and the Art of Mind-Using (p. 246)

Investors take their cues from others then rationally justify their buy or sell decisions

Most market observers believe that investors respond logically to the latest news and buy or sell based on objective valuations.

Nothing could be further from the truth.

If investor behavior was rational, price charts would be linear and without sharp rises or declines. But that is not the case. The market’s price charts do show sharp price rises and steep declines, often when the market’s fundamentals offer no explanation to justify such a move. In a word, those near-vertical price moves are irrational. They’re not driven by logic, but by hope or fear.

People have no idea where prices are going, so to satisfy the reasoning portions of their brains, they make up reasons to justify their buying and selling actions….Investors are not reasoning but unconsciously herding, and unconscious processes aren’t random; they proceed according to mental constructs. That’s why financial markets display patterns such as persistent trends, head and shoulders formations, trend channels, Elliott waves, and so on. [emphasis added]

The Elliott Wave Theorist, January 2008

These price patterns occur at all degrees of trend. That means collective investor psychology is evident in 5-minute, hourly, daily, weekly, monthly, quarterly and yearly charts.

Investor hope is even on display during major market downtrends

Notice how the Dow Industrials rebounded after the 1929 crash but before the worst part of the price decline of 1930-32 (see wave b in the chart below).

In the chart, you’ll notice that bursts of “hope” even occurred several times during the worst part of the decline itself. Memories of the Roaring ‘Twenties bull market still lingered.

More recently, investor hope lasted over three years after U.S. markets bottomed in March 2009.

Today’s market is a full degree of trend larger than even 1929-1932

After the market declined in May and the start of June, yet another burst of hope started on June 4. But brace yourself.

Get ready for a psychological change that will be reflected in the price patterns of U.S. markets


Learn to Think Independently

You’ll get some of the most groundbreaking and eye-opening reports ever published in Elliott Wave International’s 30-year history; you’ll also get new analysis, forecasts and commentary to help you think independently in today’s tumultuous market.

Download Your Free 50-Page Independent Investor eBook Now

This article was syndicated by Elliott Wave International and was originally published under the headline Witness the Epic Battle Between Investor Hope and Investor Fear. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

What the (USA) Government needs to do but won’t

Hi All,

I received the following email and liked it so much I’m reposting it on here – accreditation for this is at the bottom of the post and I’d recommend the books of this company:

Weak fundamentals continue to support  the secular bear market, which we’ve been in since 2000. Next week, I’ll have an article that focuses on  the fundamentals for the last twelve years. If you had simply bought the S&P500  on December 31, 1999 and held it since then, you’d be down more than 7%. Furthermore, if you compare GDP growth to REAL  inflation as the folks at shadowstat.com do, you’ll see that we’ve also been in  a recession since 2000.

I think the current political  arguments are quite funny. They’re really nothing more than an interesting  game. Basically, you find something to  criticize about your opponent and try to get the public to believe you so that they  vote for you. The problem is that nobody  seems to bring up the issues that actually matter—like our asymptotic  government debt and weak dollar. Politicians can’t resolve those issues, however; they can only postpone the solutions. Any politician who actually tried to do what you’d need to do to solve the issues that actually matter would never win another election.  Here are some sample solutions: Slash government spending at least  50%. Slash military spending by more than  50% and end U.S. involvement in all foreign conflicts now. Institute a national sales tax of  about 20% until the debt is reduced to zero. Void social programs (this will happen  anyway when they become too burdensome) and develop vested pension programs  like Singapore and other well-run countries have. If the government bought and held the S&P  500 average with, say, a 0.5% fee, Americans would be better off than they are now  with Social Security. We could also allow  people to invest pension money in a house in the form of a 30% down payment. Tell all politicians that they  cannot be re-elected unless the budget is balanced. Get rid of the central bank (The  Federal Reserve is owned by the large private banks). Make sure that the Secretary of the Treasury  has no ties to big businesses or big banks.

When someone proposes these kinds of  solutions nowadays, he’s considered an idiot and not taken seriously in the  political arena. But implementing these solutions is necessary if we’re going  to correct what’s wrong with the United States government.

Actually, I just found this graph, and I take back my solution. How about cutting the military by 95%?

Wars such a good idea?  clearly the major necessary wars that the USA has entered have put it into a very tricky position!  I wonder how many USA citizens got to vote whether they entered a war or not!

Clearly as myself, Dr. Van Tharp recogonises the self-importance of politicians chasing votes regardless of the better course of action – my own thoughts on this are due to the fact that political terms can be as short as 4-5 years so you win the votes and then don’t rock the boat as you seek re-election.

Readers who understand Socionomics also know that the state of the stock market plays a big part in this too.

Dr. Van Tharp has written some great books on risk and trading/Investing and I find his site http://www.iitm.com/

You’ll also find throughout this site on various pages some videos Dr. Van Tharp has kindly produced to enhance your knowledge and understanding of being a trader/investor – they are well worth viewing if you have the time to seek them out.

Enjoy

The Hovis Trader

Music & the Stock Market – Part 2

Here’s a brief video from the Socionomic Institute comparing Social mood and types of music/movies released and watched.

Once again If you can predict the start of the bear market and the end of the bull market you can then keep an eye out (after the event) for those types of movies/music releases that fit the type of market you were expecting.  Obviously movies take longer to make so it’s the music which shifts styles first.

More detailed research is held in the reports that the Socionomic Institute have produced over the years on this particular subject.

Enjoy

The Hovis Trader

Black Box Systems

Hi All,

I hope you are all fit, well and enjoying the summer.  Here in the UK it’s been a hit and miss summer – the jet-stream is 400 miles further south than it usually is at this time of year and as such we are having periods when the sky’s dumping a months worth of rain in a few hours!  Floods and floods have been the order of the summer of 2012 so far.

Right onto Black Box systems – this ones for the traders and Investors.

For those of you who have read this site or been personally tutored by me will know that you cannot predict anything in the markets with 100% certainty (from a standard Investing/Trading methodology)

I read this following piece in The Times newspaper on their Markets Business page on Thursday 5th July 2012:

“The misery of Man Group intensified yesterday when one of the City’s influential brokers more than halved its target price for the shares.

The broker highlighted the continued inability of the hedge fund group’s flagship AHL fund to make money, a decline in its more profitable “guaranteed” funds and the expected withdrawal of client cash precipitated by duff performance.

AHL, a “black box” computerised hedge fund tuned by a roomful of the cleverest people that money can buy, is supposed to find and ride trends across 300 instruments and 36 exchanges.  It takes positions in the future performance of everything from orange juice to Australian bonds.

In theory, whether markets rise or fall should be of no matter.  AHL should make money regardless.  In practice, it is not working.  In the past three months, AHL has fallen by 2.5 per cent.

Man’s shares have already collasped from 624p in the summer of 2008 to around 300p in early 2011, about 150p in March and then 70.75p on Tuesday.”

A number of points you ought to be considering:

  1. Why didn’t it take advantage of the very clear down trend in it;s own share price?  That was a clear trend!
  2. A fall of 2.5% in 3 months is not the end of the world – the share has fallen hundred of % in a couple of years though
  3. Finding trends in a sideways market is hard to do
  4. The main Focus of this post – Black Box Systems, see below
  5. 300 Instruments over 36 markets is a lot – a computer will trade the set-up if the parameters are met.

Black Box Systems

Many people will no doubt buy such programs thinking they work – this clearly shows they don’t.  I accept that they will work during certain market conditions, but the market is dynamic and grows and declines dynamically – If the market grew or declined statically then black box systems would work, but the markets doesn’t so failures like this have to be expected.

If the very clever bods putting together the rules for the black box system can’t guarantee profits, how is the ordinary person on the street expected to!

If you are new to the markets, it would benefit you greatly if you began to understand that there are no certainties or givens in the market, when you begin to start predicting what the market is going to do next it often does the opposite and catches you out.  Everybody and I mean all people that place a series of trades will have at least one loser – proving that they do not have a prefect system – It simply does not exist and the sooner you realise that right from the start that you are at a disadvantage to the market the better.  that does not mean that you are certain to lose when playing against the market, If you control things tightly you can win in the long-run.

I’ve never looked at using a Black Box System so I can’t really comment on how effective or ineffective they are – what I do know for certain is that no system exists that wins all the time.

The Hovis Trader

The Ongoing Crisis

Hi,

Think about the following:

  • The UK’s Bank of England for 38 months (yes months) have held Interest Rates at near 0.5%
  • They’ve Issued Millions in QE
  • Has this stimulus worked?
  • Clearly not, so if they know what they’re doing how come the recession (depression) is ongoing?
  • QE CREATES inflation, why issue more of it due to the devastating effects of Hyper-Inflation?
  • QE can be issued to starve off DEflation – could this be the reason for issuance?
  • Gold is a tradeable market, everyone’s talking of hyper-inflation, many people are buying physical metals to use as money – why’s the gold market crashed of late then?
  • Has this notion of Hyper-Inflation reduced significantly to reflect the current price of gold? – The truth is Hyper-Inflation is the expected outcome so logically the price of gold should have continued to rise as everyone who believes Hyper-Inflation to be on it’s way buys gold and silver – obviously someones sold it off pretty hard so they can’t be that convinced.

Why is the economy now back in recession, if they have the ability to control things and kick start the economy?

Dedicated readers (& students of mine) of this site know what’s going on, they understand how the markets work and how effective governments and central banks are during these times.

I’m not going to fully spell it all out as I’ll be here for hours typing away and you’d have reams of pages to fully consider everything, but here’s a few bullet points for you to digest and explore further should you wish:

  • The main stock markets have since 1999 moved sideways – why is that?
  • If key agencies such as the government & Bank of England have the ability to save the country, economy and people from financial misery – why don’t they?
  • Following on, if they could help, why is the action they’re taking not worked so far?
  • The most important age group for governments is the 50+ age group – why? – because they bother to vote, Which section of voters are being and have been hit the hardest since 2008?  The over 50’s, because they represent those with the highest proportions of savings and they rely on those savings in the form of money in the bank earning interest, this is the safest form of saving – some of those over 50’s will be retired and rely on the interest on their savings to support them throughout retirement – so to this group of people the interest rate is of vital importance – If the government had control of it why would they punish the very people who they rely on for votes?  Logically if governments controlled rates this is voting suicide as they’ll lose the votes of the very people they rely on to be re-elected!  Think about it.
  • What causes these bad times? and what causes the good times?
  • What can we do to protect ourselves now and if this ever happens again?
  • Ref the Gold point – this could take pages to explain, but the simple point is Gold is a market and all markets are subject to the natural laws of growth and decomposition

You have all the answers on this site, some you’ll need to purchase, read and learn, but all the answers are available for those that have the desire to search on this site.

As with everything of importance you will not find the solution in 10 mins, I’ve spent months researching over the years (most of it full-time) I’ve still not fully finished my intended research.

What most people want are concrete answers – this does not exist in financial markets – this is why during times of recession and bad times government response is basically inadequate and ineffective.

As I’ve mentioned many times before, being a buy and hold investor throughout a bear market is pointless and frankly risky, being a trader is the right course.  The time to be a buy and hold investor is when the next bull market starts – this I will do for my long-term holdings but I still like to keep control of matters and will be a partial trader – remember, even during a bull market there are severe market corrections at certain points!

To conclude – Think about the wider implications of the above, the experts will tell you all the answers – yet recovery fails to materialise!

Bull markets create an atmosphere of laziness, bear markets force you learn.

The Hovis Trader