Psychology Of Investing: Follow The Trend & Not The Crowd
Psychology Of Investing: Follow The Trend & Not The Crowd

Psychology Of Investing: Follow The Trend & Not The Crowd

psychology of investing

Repetition is the father of all sins, stupidity is the mother and not knowing when to keep one’s mouth shut is the grandfather of them all. Sol Palha

Psychology Of Investing: Don’t Follow The Crowd

If you understand how the mass mindset operates it provides you with an edge when it comes to investing in the stock market. The odds are stacked against the individual investor so that any trading advantage one can obtain, should be embraced.  The idea behind the psychology for dummies article was to create a visual representation of the mass mindset, and the chart below captures the thoughts that go through the mind of the average Joe.  The herd mentality or Pack mentality should never be embraced; one you are part of the pack you virtually guaranteed to lose.

 The masses never seem to learn from history, and sadly are doomed to relive these events again and again.  It is reminiscent of the movie “Ground hog’s day”, where the main character is condemned to relive in each day again and again for eternity. However, fortunately, he manages to find a cure for his problem.  Sadly this option is not available to the masses as they do not even recognise the problem. Over 80% of the solution to any problem is identifying the problem.

 Graphic representation of the Mass Mindset in Action 

Psychology for Dummies; Graphic representation of the Mass Mindset in Action

  1.  The stock is going nowhere; its pure junk, let me look at something else.
  2.  Lucky break, it’s going to crash definitely.
  3. What, it’s still going up! Earnings are not so good, people are getting carried away, it’s going to pull back and crash.
  4. Ahh, see I knew it was going to crash, thank God I did not buy. (Mistake the mass mindset misses the main point here. Yes, it pulled back but look where the pullback ended–miles away from its first breakout. A losers mind can only see the picture for what it is not, by replacing it with a picture from his or her imagination. Since they live in a losing sphere, they focus on the negative aspects but not on the positive aspects.
  5. What happened here; this stock was supposed to crash, how the hell did it get here? Perhaps I should have bought; I could have made a lot of money; this looks like a sure thing. (So only halfway through stage 5 will the mass mindset decide it’s safe to venture out.
  6. Now, this person finally musters the courage to buy.) Wow, it went up, great, I’m making money.
  7.  This stock is going to go to the moon; let me tell all my friends about it; it looks like a sure thing.
  8.  What happened? It pulled back. Ahh, I am not going to fall for this as I fell for it last time (look at number 4). Time to buy more, buy on the dip, that’s it.
  9. I knew it, it’s going up, and I made more money, wish I had bought more. Next time I will invest more on the pullback. (Notice the loser’s mindset does not bother to take the time to see that the stock did not put in a new high. All that matters is that it went up.)
  10. It’s going down again, time to load up; I don’t want to lose this opportunity. Earnings are great, so it must be a good time to buy some more.
  11.  The first dose of bad news and the stock takes a big hit; okay, this is just temporary; it’s going to go back up. (Blind faith huge mistake, one of the main ingredients of a losing mindset). Let me buy more and average down.
  12. Maybe I should sell now as the outlook does not look that great, but maybe things will improve.  Let me just hold for a bit longer.  Yeah, things have to change. Look how fast this stock went up; additionally,  it has pulled back so much. The worst is over; it has to go up.
  13.  This stock is dead; I have to get out.  Secondly, it looks like it’s not going anywhere (this is when the stocks start to bottom. The secret programmed desire to lose syndrome has completed its mission. Trader is in a state of extreme distress and shell-shocked). I am never going to look at this or any stock like this again. Moreover, comparatively speaking  I knew it was garbage.  Why did I ever buy it in the first place?  The stock starts to put in slow base formations and the possible start of a new uptrend. Moreover,  the worst part is that this trader is no longer in the market.  Lastly, he let panic get the better of him and bailed out just when he should have been buying.

Psychology Of Investing: Random Thoughts 

Take a close look at the above picture, for it clearly illustrates the mass mindset in action. The masses never learn, they will always be used as cannon fodder as that is the role they secretly wish for. Remember the saying “misery loves company, but stupidity simply adores it”  The masses always dump when they should be buying and buy when they should be selling.

Nothing in this world comes easy for if it did, it was not worth it in the first place. A little work and patience are all that is needed to overcome the fear necessary to break away from the masses.  In this world, it’s not what you know that can hurt you, it’s what you think you know but don’t that hurts you the most. We hope you find this psychology for dummies article useful; share your thoughts via the comment section below.

Some thoughts on Psychology Of Investing from Psychology Today

The fact is that new highs tend to beget new highs – for longer than all the pundits say they will. An old saying is “Markets climb a wall of worry” and therefore, as long as people are on TV talking about how now the market is too expensive, chances are, it will go higher.

Think about it – anyone who is “long” (holding stocks) is making money. Anyone who is not in the market but wishes they were, will eventually give in and get in. And last, those who are short (or who have sold the market because they expect it will go down), have to buy or get long sooner or later. This creates built-in buying and built-in price rises.

Conventional wisdom also holds that the market predicts the future of the economy. So today’s prices are not about today but about what will be happening in September.

It doesn’t pay to wait until a stock such as APPL – has had a near parabolic rise. But those are the rare situations. Thinking through WHY someone will pay more for a given company’s stock in the future – or what is called Theory of Mind thinking – has been shown to improve investing performance. Psychology Today

Psychology Of Investing and the Coronavirus

The first month triggers a panic like reaction, and the markets decline; the declines range from mild to wild. Currently, the masses are doing exactly the same thing they have done in the past.  Let’s take a look at the chart we posted in the last update; the MSCI World Index

Mass psychology and coronavirus

Three months after the panic-based selloff, the MSCI index was up an average of 3%, and within six months it was showing average gains above 8.5%, indicating that history is not kind to those that panic.

While all the experts out there think they are handing out sage advice, they willfully have chosen not to look at historical events, or they are purposely doing this to create a better opportunity for themselves. The last option is that they are braindead; we will let you decide what category to allocate these experts too.

The world is not going to end, and the markets are not going to drop to zero and humanity will be here for much longer than the more virulent of viruses.  We have seen this trend before and, it is missing one massive factor; the masses were not euphoric when the markets sold off. Mass Psychology (clearly) indicates that giving in to fear when the masses are not euphoric is a recipe for disaster. Hence, no matter how badly one wants to panic, one should refrain from doing so, for this will not end well for the crowd.

It’s not the Bulls and the Bears you need to avoid— It’s the bum steers.

Chuck Hillis

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