Here’s an odd observation (not mine): when people are offered 70% returns they think it’s a scam and majority will avoid investing in the venture. When they’re offered a 200% return, however, they break down and pay up!
Re-reading Reminiscences of a Stock Operator by Edwin Lefèvre, here’s a possibly relevant excerpt from the book:
One day I saw in the Paris Herald a dispatch from New York that Smelters had declared an extra dividend. They had run up the price of the stock and the entire market had come back quite strong. Of course that changed everything for me in Aix. The news simply meant that the bull cliques were still fighting desperately against conditions – against common sense and against common honesty, for they knew what was coming and were resorting to such schemes to put up the market in order to unload stocks before the storm struck them. It is possible they really did not believe the danger was as serious or as close at hand as I thought. The big men of the Street are as prone to be wishful thinkers as the politicians or the plain suckers. I myself can’t work that way. In a speculator such an attitude is fatal. Perhaps a manufacturer of securities or a promoter of new enterprises can afford to indulge in hope-jags.
“Anyone with average intelligence can learn to trade. This is not rocket science. However, it’s much easier to learn what you should do in trading than to do it. Good systems tend to violate normal human tendencies. Of the people who can learn the basics, only a small percentage will be successful traders.
If a betting game among a certain number of participants is played long enough, eventually one player will have all the money. If there is any skill involved, it will accelerate the process of concentrating all the stakes in a few hands. Something like this happens in the market. There is a persistent overall tendency for equity to flow from the many to the few. In the long run, the majority loses. The implication for the trader is that to win you have to act like the minority. If you bring normal human habits and tendencies to trading, you’ll gravitate toward the majority and inevitably lose.”
William Eckhardt, from The New Market Wizards: Conversations with America’s Top Traders
I’m getting more and more visitors who search for “triple bull s&p” and similar terms. Lots of “triple bull” searches. It started about 2 weeks ago.
Still quite a few “Great Depression charts” visitors but a lot fewer than in winter/early spring.
Of course, working with a very small sample here, but I’ll still be watching keywords for sentiment changes.
And here’s what’s going on with the “Great Depression” searches according to Google Trends. Looks like we’re entering a seasonal GD lull 🙂
I’m going to re-print one chapter of this book, in 4 parts to make it easier to read. Written in 1911, it still rings true in today’s market. Human psychology hasn’t changed at all in a hundred years!
As author G.S. Selden says in his original preface, “This book is based upon the belief that the movements of prices on the exchanges are dependent to a very large degree on the mental attitude of the investing and trading public.”
Originally published in 1912.
The Speculative Cycle, continued
…In this selling the bull leaders get a good deal of undesirable help from the bears. However wary the bulls may be in concealing their sales, their machinations will be discovered by watchful professionals and shrewd students, and a considerable sprinkling of short sales will be put out within a few points of the top. This is one of the reasons why the long swings in active speculative stocks are smaller in proportion to price than in inactive specialties of a similar character – contrary to the generally received impression. It is rare that any considerable short interest exists in the inactive stocks.
Once the top-heavy load is over-turned, the decline is usually more rapid than the previous advance. The floating supply, now greatly increased, is tossed about from one speculator to another at lower and lower prices. From time to time stocks become temporarily lodged in stubborn hands, so that part of these shorts take fright and cover, causing a sharp upturn; but so long as the load of stocks is still on the market the genial course of prices must be downward.
Until inventors or big speculative capitalists again come into the market, the load of stocks to be carried by ordinary speculative bulls increases almost continually. There is no lessening of the floating supply of stock certificates in the Street, and there is a gradual increase in the short interest; and of course the bulls have to carry these short sales as well as the actual certificates, whether the sale be made by a short or a long. Shorts cover again and again on the sharp breaks, but in most cases they put out their lines again, either higher or lower, as opportunity offers. On the average, the short interest is largest at low prices, though there are likely to be periods during the decline when it will be larger than at the final bottom, where buying by shorts often helps to avert panicky conditions.
The length of this decline, like the extent of the preceding advance, depends on fundamental conditions; for both investors and speculative capitalists will come into the market sooner if all conditions are favorable than they will in a stringent money market or when the future prospects of business are unsatisfactory. As a rule, buyers do not appear in force until a “bargain day” appears. This is when, in its downward course, the heavy load of stocks strikes an area honeycombed with stop loss orders. Floor traders seize the opportunity to put out short lines and a general collapse results.
Her are plenty of stocks to be had cheap, and shrewd operators – large and small, but mostly large or on the way to become so – are busy picking them up. The fixed limits of many investors are also reached by the sharp break, and the stocks they buy disappear, to be seen in the street no more until the next bull turn.
Many shorts cover on such a break, but not all. The sequel to the “bargain day” is a big short interest which has overstayed its market, and a quick rally follows; but when the more urgent shorts get relief, prices sag again and fall into that condition of lethargy from which this consideration of the speculative cycle started.
The movements described are substantially uniform, whether the cycle be one covering a week, a month, or a year. The big cycle includes many intermediate movements, and these movements in turn contain smaller swings. Investors do not participate to any extent in the small swings, but otherwise the forces involved in a three-point turn up and down are substantially the same as those which appear in a thirty-point cycle, though not so easy to identify.
The fact will at once be recognized that the above description is, in essence, a story of human hopes and fears; of mental attitude, on the part of those interested, resulting from their own position in the market, rather than from any deliberate judgement of conditions; of an unwarranted projection by the public imagination of a perceived present into an unknown though not wholly unknowable future.
Laying aside for the present the influence of fundamental conditions on prices, it is our task to trace out both the causes and the effects of these psychological elements in speculation.