To be wise is to be open, to be open is to be knowledgeable; to be knowledgeable is to understand that you really know nothing. Sol Palha
Mass Psychology is the study of group behaviour; the mass mindset draws comfort from the fact that everything is okay because the majority support this viewpoint. In other words, an investor feels comfortable buying technology stocks because it appears that everyone thinks that high-tech is the way to go. In other words, they are lemmings; they are following the herd mindset, which draws comfort from being part of a group. In the markets teamwork does not pay; high levels of comfort usually correlate with market tops. Buy when the Crowd is in panic mode and sell when the Masses are Euphoric.
Never follow the Crowd
An investor who took the time to analyse what was going on could see that the Interrevolutioniseolutionize the way information was transmitted; the consumer would finally move from the passenger seat to the drivers’ seat. They also noted with great interest that the public at that time was against or completely ignoring this sector; this is an essential facet of mass psychology. They took positions in these stocks as early as 1994 to early 1995, with the majority taking stakes in 1996, the masses only began to awaken to this phenomenon in mid to late 1998, by 1999, there was a feeding frenzy as everyone simply piled in.
Pay Attention to Market Leaders
The leaders were alarmed at this behaviour, as they should have been since this frenzy was not sustainable. Knowing that the end was near, they started to sell towards the end of 1999 and move their assets into cash and bonds, while the feeding frenzy continued. In March 2000, the markets started to correct and by the end of the year the main uptrend line was violated, and the market was ready to crash. By 2002, the market had lost more than 70% of its value and many of the masses who had momentarily tasted wealth moved to a state of poverty that they could not have envisioned a few months back.
Mass Psychology points to Keep in Mind
- The leaders represent less than 2% of the population yet take in more than 90% of the profits. Getting to this stage is not easy as it involves changing one’s fundamental modes of behaviour. You need to do the opposite of what your emotions dictate when it comes to the markets.
- You have to learn that when something is popular the end is very near
- When an investment is viewed with disdain or frowned up, then the time to open a position is close at hand.
- You have to learn how to fight the fear of selling out to fast after taking a position, remember it won’t just go up., most likely it could even go down a bit more or move sideways for months or even a year. The one area you can draw comfort from is this, the longer the sideways action, the stronger the upward move will be when it finally transpires.
- Keep extra money on hand so that you are in a position to open additional positions at an even better price.
- In all likelihood you will have a 50-100% retrenchment in the first stage of the bull market, meaning that your shares could double and then shed a significant portion of the gains.; this is known as the shakeout phase, whereby the weak hands are forced out of their positions and end up selling at or very close to the bottom. Holding on to the position usually, leads to huge rewards.
- When the investment suddenly starts to become popular with the masses, be on guard and a perform simple trend line analysis on all your holdings. Once the long-term primary uptrend shows signs of wear, start banking your profits and tighten your stops.
- Wait patiently for the next opportunity to show up, there is always another opportunity.
This is meant to be a brief introduction into the very esoteric; we use the word esoteric only because it’s made to appear that way, but in reality, the concept is very simple and easy to understand. Once you understand the basic concepts of this subject it becomes easy to understand why the masses will always be on the wrong side of the markets. We have subdivided this subject into several articles and the links to all those articles are listed at the end of this article.
When one combines Mass Psychology with Technical Analysis, you truly have a very potent weapon that can be used very effectively to position oneself in the right investments and consistently be on the right side of the market.
Now that you know the basics of how to profit by using Mass psychology to your benefit make sure you also read the section on contrarian investing and one key factor that is important to all stock market traders and investors, portfolio management. Without portfolio management., even the most successful trader is doomed to fail.
The video below provides an overview of the subject for those of you who prefer to listen and watch as opposed to reading the above text.
In an extensive reading of recent books by psychologists, psychoanalysts, psychiatrists, and inspirationalists, I have discovered that they all suffer from one or more of these expression-complexes: italicizing, capitalizing, exclamation-pointing, multiple-interrogating, and itemizing. These are all forms of what the psychos themselves would call, if they faced their condition frankly, Rhetorical-Over-Compensation. James Thurber 1894-1961