Market Psychology and our Human Behaviour

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The miracle of thought

Our imagination can take us anywhere. The psychology of human behaviour that drives share prices is often a source of wonder. It’s challenging, its intriguing, it’s fascinating and its fun. No, not fundamentals, not news, not rumours but the psychology of how we perceive the myriad of complex variables.

The most interesting aspect of price movement is that which we cannot value. That is the blue sky of imagined possibilities. Don’t be left in the dark wondering why. Take the price at face value and follow it is the best advice I can give you.

Price discounting.

The price force we all try to understand,and we are usually dealt a quick lesson on how price behaves when we start trading. You know, the company delivers a great result and the price goes down. My initiation was when the bombs started going off in IRAQ in 1991 when the US invaded, I was well set in the gold market and feeling confident as it climbed steadily on expectations and when shots we’re fired gold plummeted. Ugh! My learning curve, buy the rumour, sell the fact.

You rarely make the same mistake twiceand are quick to understand one aspect of price psychology and that is one of expectations, and if your curious you will want to learn more about the advantage of understanding the price action, what drives it, how it behaves and most importantly, how to profit from it. Read, trade, and learn.

Price Excesses.

They occur all the time as prices exceed perceived fundamental valuationor in some cases trades well below it. Fundamental valuation is a marker to be exceeded or undershot for reasons of sentiment. Rarely do prices trade at ‘fundamental value’. So, overvaluation is driven by sentiment (as is undervaluation) and as humans go, in the right situation, they will believe anything can happen. We have endless examples of big momentum power moves of stocks and markets, and the reverse is true in some situations like the GFC.

Sentiment is a powerful force.The advantage price analysts have is that they follow human behaviour and are not pegged to the fundamental ‘value’. This frees us up to take advantage of the repeated excesses in markets, human behaviour, and price action. Excesses are opportunities and reflect momentum moves driven by human behaviour. They are valuing the invaluable and no-one can put a price on that.

 

It’s the crowd behaviour that gets us going and to a certain extent price can become almost irrelevant under these situations. The irrational crowd behaviour ‘scramble’ is a wonder for us all to see but there lies the big opportunity. It can also be dangerous I know as inevitably prices will correct but having a good awareness and when managed appropriately with the right discipline, they are opportunities that can be turned into profits.

These effects are history repeating itself, yes, but that history is driven by human behaviour and we all know we are creatures of habit. The price trend being the most common and oft occurring behaviour we can take advantage of. Price analysis is not about predicting the future it is about observing, identifying and following human behaviour that repeats itself.

 

The psychology that drives stock prices

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Normal human behaviour easily attains the emotion that anything is possible and that the sky is the limit, and this is very much propelled by the crowd behaviour phenomenon.

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Biases, Perceptions and Poise.

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Perspective and clarity

A share price is at the mercy of market sentiment and investors are often affected very much in their decision making by such emotions as anchor bias, and other such like confirmation, information, loss aversion and hindsight biases.

Definitions of these are readily available on the web and are recurrent examples of why investors make trading or investing mistakes and I discuss this in my YouTube videoMy 5 top tips for success on the stock market.

PGH example

So, using the example of PGH above I would think now many previous investors are somewhat shy (anchor bias) of investing back into PGH. Righty so maybe but you might remember the ‘emoji guide to investing I showed in last week’s Radar Newsletter (25/1/19) demonstrating the fact that the key to consistently successful investing is to be poised and maintain a balanced perspective no matter what the market is doing.

Looking through the haze

Right now, PGH investors are suffering but realistically having halved in price back to its initial starting price at listing and is now showing potential demand at this support level the stock must go on the radar again of starting to look valuable and having to potentialfor a turn back up. Not that I want a long-term investment because that’s not how I play the stock market, but these points can often be scrambling points when a change of sentiment can take hold and trigger all sorts of portfolio rebalances, short position exits and fresh ‘value’ buying etc. Looking at the stocks afresh with clarity and perspective can be hard because of our biases but that’s what we need to be able to do.

Focus on your own style

My style of trading and investing is looking for those types of investor changes that can trigger sharp price moves and new trends to capitalise on. PGH and many other stocks are currently in this position and over coming weeks I will point you to a few of these opportunities that this falling market has now delivered.

Bull or Bear?

Whether the ASX/200 rises of falls from here is to a large degree irrelevant when assessing individual stock performances. Yes, a rising market offers more opportunities and a falling market less, but still opportunities always arise in any market and this one is no different. Are we in a correction phase or beginning a new wave higher? That is always the eternal question. Don’t even try and answer it because you can’t and it’s simply a major distraction. Keeping a clear head is vital.

How to play it

Smart stock investors always remain poised and have the ability to have good perspective without biases and emotions. This will help your success rate immeasurably.

Sharpening your trading and investing psyche

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I understand the mental battles we all have, having gone through them myself, but successful investors and traders all eventually understand two things very clearly.

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Here are nine surprising things Jesse Livermore said regarding excessive trading:

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Here are nine surprising things Jesse Livermore said regarding excessive trading:

1. “Money is made by sitting, not trading.”

2. “It takes time to make money.”

3. “It was never my thinking that made the big money for me, it always was sitting.”

4. “Nobody can catch all the fluctuations.”

5. “The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money everyday, as though they were working for regular wages.”

6. “Buy right, sit tight.”

7. “Men who can both be right and sit tight are uncommon.”

8. “Don’t give me timing, give me time.” and finally, the most important thing:

9. “There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. Not many can always have adequate reasons for buying and selling stocks daily – or sufficient knowledge to make his play an intelligent play.” Jesse was a trader but he knew the value of staying with positions and sometimes not trading at all. Once he began to follow tips from others or trade when he should have abstained, all of his progress had come undone, and with it, his sanity.

Jim Rogers shares his brilliant insights

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rogers

1.  “Most successful investors, in fact, do nothing most of the time.”

2.  “If you want to make a lot of money, resist diversification.”

3.  “It is remarkable how many people mistake a bull market for brains.”

4. “On Wall Street there’s no truer adage than …’markets can remain irrational longer than you can remain solvent.’”

5.   “No matter what we all know today, it’s not going to be true in 10 or 15 years.”

6.   “If you want to be lucky, do your homework.”

7.   “Swim your own races.”

8.  “If the world economy gets better, commodities are very good place to be in … even if the world economy does not improve, commodities are still a fabulous place to be.”

9.  “The most sensible skill that I can give to somebody born in 2003 is a perfect command of Mandarin.”

10.  “Become a Chinese farmer, that’s what you should do.”

11.  “If you can find ways to invest in Myanmar, you will be very, very rich over the next 20, 30, 40 years.”

12.  “India is not a place for investors, but it’s a fabulous country for tourists”

13.  “I don’t know any way to short either Harvard or Stanford.”

14.  “I was poor once, I didn’t like it, I don’t want to be poor again”