Mass Psychology Keeps You On The Right Side Of The Markets
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 an old phenomenon; it has been around forever. However, it has only been brought to light recently. This phenomenon is encoded in all creatures; we tend to feel comfortable when we do something together. Everywhere you look you can see this in play; a flock of birds a herd of beasts, a shoal of fish, etc. they all follow a leader. In this article, we address the essential principles of mass psychology. For a more comprehensive look at the subject, consider reading the entire How to use Mob psychology to invest in the markets
Mass Psychology is the Study of the Mass Mindset
Mass psychology is the study of group behaviour; the mass mindset draws comfort when it does not go against the views held by the majority. For example, an investor feels comfortable buying biotech stocks because the crowd thinks it’s a good buy. In other words, they are acting like lemmings; they are following the herd mindset. In the markets teamwork does not pay; when the masses are euphoric, it is time to head for the exits and vice versa.
The astute investor purchases when the crowd panics and sells when the mob is jumping up with joy. The phrase to keep in mind is the following ” buy when there is blood in the streets and sell when the masses are ecstatic“. This is the only way you can buy low and sell high with little to no stress. The masses refuse to use history as a guide and in failing to do so they are doomed to repeat it again.
Article of interest: The Masses Are Overreacting To The Coronavirus
Never follow the Crowd
The astute investor follows the masses to see what they are doing and when the emotions hit a boiling point, this investor opts for a position that’s contrary to the position of the masses. Instead of following the leader, you should opt to become the leader. The ones that lead are the ones that draw all the benefits, while the ones that follow the leaders blindly are the people who take all the risks. The stock market provides a perfect illustration of this unhealthy relationship. A great example is the dot.com boom that started around 1994 and imploded in 2000.
An investor who took the time to analyse what was going on could see that the Internet would revolutionise 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.
Article of Interest: Mass Hysteria Equates To Stock Market Opportunity
The Crowd Is Almost Always On The Wrong Side Of The Fence
or when the Crowd views a particular sector through a negative lens. Astute investors opened positions in the interest sector from 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. A year later the sector imploded and the rest, as they say, is history.
Follow The Smart Money & Not The Dumb Money
The leaders were alarmed at this behaviour, as they should have been since this frenzy was not sustainable. History clearly indicates that the masses have never been on the right side of the markets going back all the way to the Tulip Mania. One can clearly see how the big players employ mass Psychology to fleece the masses; the topic is dealt with very succinctly in this article; Psychological & Economic Deception Wall Street’s Weapon of Choice
Back to the dot.com bubble; 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 began to correct, and by the end of the year the primary 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.
Article of Interest: Hysteria Definition Equals Overreaction To The Coronavirus
Key Principles of Mass Psychology
- The leaders represent less than 2% of the population yet take in more than 90% of the profits.
- When something is popular, the end is very near. One needs to do the opposite of what one’s emotions dictate when it comes to the markets.
- 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 too 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.
Other points to keep in mind
- Keep extra money on hand so that you can open additional positions at better if the opportunity arises
- 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 become popular with the masses, pay close attention to market sentiment. Perform simple trend line analysis on all your holdings. Once the 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 chance.
Article of Interest: Trading The Markets & Investor Sentiment
Technical Analysis With Mass Psychology Improves Risk To Reward Ratio
Mass psychology is not a complex field; in fact, it is very easy to understand; all one needs is a bit of common sense
Once you understand the basics, it becomes easy to see why the masses are on the wrong side of the markets. When one combines Crowd Psychology with Technical Analysis, the risk to reward ratio improves significantly. This combination provides one with the opportunity to consistently be on the right side of the market.
Identify the emotion that’s driving the masses
Mass Psychology comes to identifying the emotion that is driving the markets. Once you identify the emotion, it is very easy to spot a new trend. Now that you know the basics of Mass psychology you might also find the contrarian investing topic to be of interest. One key factor that is important to all stock market traders and investors, portfolio management.
Article of Interest: Volatility Index Readings & Stock Market Trends
The Trend is your friend
There is no tool more powerful than Crowd Psychology; it is the crowd that drives the market and the driving force behind the masses is emotions. Therefore it is imperative that you understand what emotions are driving the masses at any given moment in time. Understand the emotion, and you know the market. Only then should one look into trying to master technical analysis. Fundamental analysis is fundamentally flawed as the data is provided in a standard format. This means that anyone looking at the data will arrive at the same conclusion.
In an extensive reading of recent books by psychologists, psychoanalysts, psychiatrists, and inspirational lists, I have discovered that they all suffer from one or more of these expression-complexes: italicizing, capitalizing, exclamation-pointing, multiple-interrogating, and itemising. These are all forms of what the psychos themselves would call, if they faced their condition frankly, Rhetorical-Over-Compensation. James Thurber 1894-1961
Understanding psychology is key to becoming a better investor; if you understand the emotion driving the market, you will be light years ahead of the competition.
The masses are unaware that everything is manipulated; from the food, you eat to the information you are provided. Hence they cannot come up with a plan. 80% of the work involved in finding a workable solution is to identify the problem correctly. The mass media and the top players understand that if they alter your perception, they can control your actions. In other words, if the angle of observance is altered so is your perception. If you understand this simple principle, then you will be in control of your perceptions.
Most experts focus on the tree or the forest; in both instances, they fail to see the big picture. This is why most experts are on par with rubbish; a smelly substance that has a strong effect but produces nothing of value. We firmly suggest that you read or view Plato’s allegory of the cave; it will open your eyes to the basic concepts of Mass Psychology and why so-called experts are almost always wrong.
Knowledgeable Experts on the subject of Mass Psychology
“It is crowds rather than isolated individuals that may be induced to run the risk of death to secure the triumph of a creed or an idea, that may be fired with enthusiasm for glory and honour… Such heroism is without doubt somewhat unconscious, but it is of such heroism that history is made.”
“He is no longer himself, but has become an automaton who has ceased to be guided by his will.”
“In a crowd every sentiment and act is contagious, and contagious to such a degree that an individual readily sacrifices his personal interest to the collective interest.”
“Ideas being only accessible to crowds after having assumed a very simple shape must often undergo the most thoroughgoing transformations to become popular. It is especially when we are dealing with somewhat lofty philosophical or scientific ideas that we see how far-reaching are the modifications they require in order to lower them to the level of the intelligence of crowds…. However great or true an idea may have been to begin with, it is deprived of almost all that which constituted its elevation and its greatness by the mere fact that it has come within the intellectual range of crowds and exerts an influence upon them.”
“The majority of men, especially among the masses, do not possess clear and reasoned ideas on any subject whatever outside their own specialty. The leader serves them as guide.”
“How numerous are the crowds that have heroically faced death for beliefs, ideas, and phrases that they scarcely understood!”
“Were it possible to induce the masses to adopt atheism, disbelief would exhibit all the intolerant ardour of a religious sentiment, and in its exterior forms would soon become a cult.
“In crowds the foolish, ignorant, and envious persons are freed from the sense of their insignificance and powerlessness, and are possessed instead by the notion of brutal and temporary but immense strength.
”consciously on men’s minds is the only real tyranny, because it cannot be fought against.”(The Crowd: A Study of the Popular Mind – Gustave Le Bon)
Quotes from Michael Montaigne
Mr Montaigne was a very wise man and the quotes listed below provide a window into the inner workings of the mass mindset and can be used to improve one’s understanding of Mass Psychology
Ignorance is the softest pillow on which a man can rest his head.
Rejoice in the things that are present; all else is beyond thee. Michel de Montaigne
A wise man never loses anything, if he has himself. Michel de Montaigne
The most certain sign of wisdom is cheerfulness. Michel de Montaigne
In true education, anything that comes to our hand is as good as a book: the prank of a page- boy, the blunder of a servant, a bit of table talk – they are all part of the curriculum. Michel de Montaigne
Age imprints more wrinkles in the mind than it does on the face. Michel de Montaigne
Carl Jung on Crowds
“…if people crowd together and form a mob, then the dynamisms of the collective man are let loose – beasts or demons that lie dormant in every person until he is part of a mob. Man in the mass sinks unconsciously to an inferior moral and intellectual level, to that level which is always there, below the threshold of consciousness, ready to break forth as soon as it is activated by the formation of a mass.”
“The bigger the crowd, the more negligible the individual.”
“A group experience takes place on a lower level of consciousness than the experience of an individual. This is due to the fact that, when many people gather together to share one common emotion, the total psyche emerging from the group is below the level of the individual psyche. If it is a very large group, the collective psyche will be more like the psyche of an animal, which is the reason why the ethical attitude of large organizations is always doubtful. The psychology of a large crowd inevitably sinks to the level of mob psychology. If, therefore, I have a so-called collective experience as a member of a group, it takes place on a lower level of consciousness than if I had the experience by myself alone.”
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