Herd Behavior: The Gift That Always Rewards With Loss
Traders that are driven by fear lose on both ends of the trade; they don’t short the markets or go long. Shorting the markets is not a recommended course of action when the trend is positive. However, at least one is attempting to do something, instead of letting fear take over. After that harrowing experience, they have nothing to show for it, other than an even larger appetite to be taken to the cleaners at some future date. This is sometimes referred to as the secret desire to lose syndrome. Market Update Sept 9, 2020
Before we continue, remember the expression or sayings such as misery loves company and or the Tactical Investor’s variation that adds a second part, and stupidity simply demands it. Or another two TI saying Riches come to those who seek it, or the early bird gets the worm and the late one the bullet. No matter how hard one’s tries, one cannot change the order. Herd behavior is ingrained in the mass mindset. The masses are destined/almost doomed to lose because they refuse to accept a straightforward factoid; fear pays poorly. And because they refuse this simple fact, they are doomed to repeat the mistakes of the past with perfect precision.
Peter Lynch, one of the legends from wall street, generated 29% annualised returns from 1977 to 1990 taking Fidelity’s Magellan assets past the $14 billion mark. So, the natural assumption is that anyone that invested in his fund banked the same amount in gains. Based on logic, the answer would be yes, but this is where the secret desire to lose syndrome comes into play. It turns out that most of the individuals that invested in the fund lost money. How in the Hell could this happen? You already know the answer; Fear pays poorly. The masses are wired to stampede and flee for the hills; the moment things start to look dicey. This is why so many new Tactical Investor subscribers panicked when the markets sold off in March, while those that read all the suggested materials and past issues of the market update embraced the pullback and made out like bandits. Both groups subscribed, but the outcome was different for each.
Herd behavior: The only way to win is to challenge the Herd mentality
On the same token, the reason so many Magellan fund subscribers lost was that they were trying to outdo Lynch. They sold when the going got tough and purchased the fund when everything looked rosy; the perfect recipe for destruction. This is another reason why we consider performance results or statistics of how well a service does to be meaningless. The best way is to look at past material and draw your conclusions because, at any given time, one person could walk away with 100% in wins while the other could technically lose it all.
Back to Peter Lynch; individuals would jump into the fund when it was doing well and sell when it was faring poorly. Instead of buying low and selling high, they bought high and sold at the bottom. Fidelity conducted an extensive study, and the results were quite impressive. The average investor not only fared poorly, but the story gets better, they did not even break even. Imagine that a fund with such stellar returns and the average investor could not even break even.
So, what can we gather from this? That no matter how good the fund managers are, stupidity trumps logic. Investors allow emotions to enter into the equation; the decision to buy is based on greed, and the decision to sell is based on fear. In essence, the odds of winning when employing such a strategy is virtually zero.
While we expect this market to soar to unimaginable levels, the bulk of the players will have a hard timing making any money, for they will follow the above playbook. This means that Tactical Investors have the opportunity to make out like bandits.
Bearish sentiment rose slightly, note that this data was collected before the markets started to sell-off. Remarkably Bullish sentiment is now trading below its historical average for over 30 weeks in a row. While bearish sentiment refuses to drop below 33.00. All in all, this means that no matter what the experts state, every healthy pullback ranging from mild to wild has to be embraced without exception. Market Update Sept 9, 2020
Bearish sentiment has soared to 49; the masses are almost in a state of frenzy, but the primary driving emotion behind this state of turmoil is uncertainty. Please take a look at the number of individuals in the neutral camp; it has virtually not budged for quite some time. Last weeks reading stood at 27, this week reading is 27, and it has been hovering around this range for weeks on end. We have lemmings jumping back and forth from the bullish to the Bearish camps; this is the guillotine master’s dream come true, for the supply of heads is endless in such a setup.
If the current support at 27460 does not hold, then a break of 27K is expected at least on an intraday basis. Now the normal reaction for novice traders is to panic at the thought the markets could trend lower. In doing so, vital energy is wasted on viewing an opportunity through a negative lens. Individuals that take this approach are usually like deer’s frozen in front of a speeding truck. The glare of the headlights impairs their judgement, so even though they could quickly jump out of the way, fear keep them frozen in place until the inevitable transpires. Market Update Sept 9, 2020
The Dow dropped to 27065 before reversing course, so for now, it has followed the projected trajectory. Given the wild action and that V-readings are not letting up, it’s almost a given that the 27,000 ranges will be tested again.
If the Dow closes below 27,000 on a weekly basis, then a test of the 26,300 to 26,470 ranges is likely. There is no reason to panic for the trend is positive; hence, whether we like it or not, as Tactical Investors, we have to embrace these pullbacks and dare to do attempt the unimaginable. Celebrate in the face carnage for the separating factor between disaster and opportunity are perceptions.
The crowd views disasters such as sharp pullback or so-called crashes through a negative lens because that is how they have been conditioned to react. Like a good computer, their minds follow the programming to a T; run in the face of panic and buy in the face of joy.
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