Market Psychology

Market Psychology

A couple weeks ago my long time friend gave me $100,000 to invest/manage for him in the stock market. Despite semi-persistent questioning as to why I hadn’t purchased anything during the first week, as I did not like market conditions I kept his position 90% cash. As the market has had a substantial pullback since then, I crowed to him this morning via text, asking him if he was thankful beyond all recognition that I had kept his money out of these dicey, shark infested waters.
“Yes, thank you for not losing me money like everyone else has,” came the response, “I am getting creamed personally,” he stated, “I got into the market March 10th of this year. Why not March 10th last year?!!”
I briefly considered and replied that there was a very simple psychological explanation for this, that applies not only him, but most of the human race. As you, the reader, are likely also human, I thought the explanation might apply to you as well.
Last March 10th the market was at its lowest point in over a decade. Pessimism was rampant. My friend’s accountant swore to him, “the market ain’t coming back,” and advised him to liquidate his holdings before it sank lower.
I remember waking up with a sense of dread, fearing to see how much further my positions had sunk in value. Then sometime around the beginning of March, I remembered a quote attributed to Rothschild “When there’s blood on the streets, buy.” There was definitely blood .. The thought went through my mind to put ALL my money into Wells Fargo stock, but even a self perceived risk-taker like myself couldn’t pull the trigger on this for fear of going completely broke. I did buy low, but the position I took was much smaller than it should have been simply because I, like everyone else, had some fear. (though apparently I didn’t fear enough not to buy something.)
On March 10th this year the market was continuing a meteoric rebound, and had risen 60% in value off the lows. More optimism. “Things are turning around, my portfolio is going up, how are your investments doing?” People are largely herd animals. Most people don’t want to stick their necks out, don’t want to do anything risky, most people want to fit in. “Just let me fit in, just let me be accepted. I don’t want to stand out.”
As peoples’ emotions warm to the market, more and more people are willing throw their money in. They want to be part of the herd. They don’t want to miss out. Far easier to enter into a rising market, then one that’s dropping like a rock.
The simple fact is that my friend’s decision, may largely be attributed to group think- “I do as others.” In March of 2009, the market was undervalued on a FUNDAMENTAL basis, where the value of the stocks was completely out of whack against their intrinsic value. While stocks are no longer cheap, though with the recent pullback there are more appetizing prices on the horizon, unless you want to play the momentum, you should base your purchase of stocks on what you consider the true worth of the company to be. When everybody is cheerleading a stock, or the market in general, unless something fundamental has recently changed (like the Internet which made communication so much cheaper, or if someone were to achieve cold fusion- free energy, the end oil and coal) and you decide, “well, everybody’s saying what a great stock this is,” just remember this-- you almost always pay a high price for a rosy consensus.
If you aren’t already in the market, I think you should wait for lower prices right now. I sold off about 17% of my portfolio before the recent drop. Once again, there was a little fear about making a bigger bet on the market decline, but I’m still glad I sold off some. … let me know your thoughts on anything that struck you here.


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