Unlocking Human Behavioural Trends

The mystery quality of the stock market crystal ball was discussed in my last blog article. The markets remarkable performance this year bouncing strongly from a fear driven collapse has provided a telling example of this.

What do we see?

History shows us it is Psychology, Momentum and Narrative that drives the stock market – not fundamentals.
Phillip Hofflin – Lazard Asset Management

The distractive element of fear was foremost in many investor’s minds but just as amazingly many stock prices quickly rebounded. This week I’d like to further develop this concept of market perceptions and see if we can see take a peek through the mire and understand a little bit more about what it is that enables us as humans to mysteriously and collectively drive stocks in certain directions and then perhaps see what a sound tactic may be that allows us to try and capitalise on it.

To understand this argument there is a need to separate specific stock and indices performance. Indices are always skewed towards the higher cap stocks and are often a major distraction when assessing specific stocks. They are literally different beasts, and it highlights the difficult issues for the top-down approach when assessing and analysing specific stocks. In the end we just want money in our pocket. The recent ‘tug down’ followed by an ‘explosion up’ pattern of 2020 clearly has not travelled a fundamentally driven path. And in reality, fundamentals differ from stock to stock as has been the characteristic of this market recovery. Fear took hold then the availability of easy money coupled with an acknowledgement that some existing and some futuristic drivers were on the cusp of generating a new, exciting, and in many cases, tangible avenues of profitability, and this propelled already burgeoning online businesses further ahead. The ‘weight’ of these stocks in the US drove the major indices especially the Nasdaq, higher and higher.

Being at the coal face communicating with members regularly I get a glimpse of their thoughts and intentions. Invariably they err in their thinking about what the market will do, but my members understanding that human frailty are respectful enough of a process, to know that by following an emotionally detached systematic approach based on psychology and momentum it can yield positive and generally more reliable returns. Whether they always do it or not is another story but they’re working on it.

Some of our tech stocks are at the high end of valuation levels as they try and ‘copycat’ US tech valuations, but they will in all probability adjust to ‘valuation’ reality at some stage. But at the same time, they also offer profitable ‘momentum’ trades for the nimble footed if assessed on a price behaviour basis alone. Taking one focus, based on one strategy, often will yield solid results. The Stockradar strategy does not focus on the why but rather the fact that it is (going up). Why? As we know investors thoughts often wrong and the dumb old robotic system devoid of character or any level of interesting thought is often right. The conundrum. Truthfully, I have taken the line of least resistance and stopped reasoning it out preferring to simply enjoy a strategy of following the ‘waves’ of momentum as they come and go and at the same time ensuring capital is always well protected.

However, I will try and shed some light on the difficulty that faces us in exploring the ‘why’, and also the benefits of having a single-minded trend / momentum focus based on the ‘is’. I listened recently to Phillip Hofflin a Portfolio manager at Lazard Asset Management discuss the inexplicable nature of stock market bubbles. He covers some of the recent stock market ‘adjustments’ pointing to the differing characteristics of each of them and the rather concerning inability of us to understand the why or when of the collapses which inevitably they all precede.

Much has to do with the comfort we take from crowd behaviour. Analysis of the fundamentals, he states, didn’t ever provide the answer although they are part of the narrative. It seems it is often about finding the next big thing and as to multiples well the market appears to pay what the market is prepared to pay and that can change radically and quickly, justification comes later. It defeats their purpose for the most part. This drives the focus of share prices always returning to the mean and ignores the great potential of human driven momentum that move prices a long way from the mean and into excess.

Google and Facebook are unique unicorns of our current stock markets, unlikely to be reproduced, although that doesn’t stop us chasing the elusive stock that may ‘do it’. In Australia we attach those high valuations to our tech stocks in the hope of unearthing the next Facebook of Google. It’s unlikely, nowhere in Europe the UK or Australia have we gone close. Most of us are hanging our hats on stocks like APT. Let’s see what the future brings us there.

Poseidon, that became WMC, is another example of a single stock that drove another mining boom and this we know ended badly. It began with good fundamentals but as the search for the next Poseidon went on investors started paying crazy prices looking for ‘copycat’ stocks, which in the end proved fruitless and down the market came. Fortescue is similar and its amazing share price growth has not been reproduced anywhere in our market – but we still keep chasing and looking for the next one – look at some of the recently rocketing mining stock prices. I expect for now FMG will continue to carve it path north.

A further conundrum comes from ASIC. ASIC tells us that the current market is made up of an abundance of new entrants. It reports in June 2020, 300 stocks doubled in price (and there is probably some of the wannabe FMG miners in there), 80% of trades were individuals, normally it’s 10-15%. There is something very wrong with the makeup of this current market and the message is clearly one of concern. But we should remember there are some far more stable and ‘honest’ stocks for us to focus on. That’s a choice we make, and it has to do the with psychology of where we want to place our bets. The markets, or stocks, can be as safe as we want to make it.


The tech boom that ran into 2000 was another bubble which was looking for the next MSFT. We took our tech stocks and put US valuations on them like Sausage Software, Solution 6 and Liberty One, all collapsed to nothing and don’t even exist anymore. And where is MSFT now – still striding ahead. If you had just put your money in MSFT at the right time! Booms are often driven by “what’s the next great winner” and once the realisation come that there isn’t’ one, down the market comes.

Market booms and busts are driven by Psychology, Momentum and Narrative as Phillip Hofflin says. The current market boom in the US is not necessarily driven by the fundamentals or lower rates. It is optimism for the future. That’s what humans do. When rates are this low there is trouble and economies are reflecting that, but some stocks are not. That’s not what is driving up stock prices at the moment although we continue to draw on that tangible argument for what stock prices should do. We need to understand better. The market is certainly not moving as one, so why some, and not others.

There is a small number of stocks carrying heavy load of market capitalisation (and expectations) which is still increasing (nearly 50% of the Nasdaq market cap is made up of just 6 stocks) and that’s lifting indices and that generally makes us feel better. That’s where we are at now and my point is if it’s there, take it, and don’t ask too many questions and searching for the ‘wannabe’ proves to end in disaster most of the time. There are still many stocks that aren’t doing so well. This small group of stocks that are rising are making, or about to, make a lot of money as technology and science drive innovation and efficiencies previously not available. There will however only be the few that really succeed in knocking the lights out.

So, where does this leave us. Wondering, and our market is very different to the tech heavy US market. Every bull market is different as are the resulting falls and reasoning them out does not help. Is there an answer to the questions of why and when markets or stocks rise and fall? Should we measure performance with indices. How useful and relevant is that? The why and when is elusive. The fact is that they (indices and stocks) do. It partially explains why it is that ‘the dumb old robotic system devoid of character, thought and any level of interesting discussion’ based on price behaviour and its momentum characteristic that can often perform better and more reliably performance rather than the traditional forms of ‘tangible’ analysis that for some reason we desperately need to hang to. The MSFT share price behaviour above provides a telling example and has made some millions. And in the end the price of an individual stock doesn’t lie or care what the ‘general’ market is doing.

We as humans’ trend in our behaviour. What we eat, what we wear and how we look after ourselves. There are many fashions that drive our behaviour, and the stock market is no different. Why shouldn’t it be, its driven by humans? Where money is concerned it distorts and magnify those trends. This is perhaps why we get such overblown states of euphoria followed by catastrophic periods of deflated expectations. Just as fashion, food and other human psychological forces do, stock trends come and go in different magnitudes. The market is hard to ride we can only try and achieve a certain level of success and hopefully, if we’re smart enough to ride the trend ‘waves’, it will be a profitable journey.