The Psychology Of The Stock Market, 1/4
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
Most experienced professional traders in the stock market will readily admit that the minor fluctuations, amounting to perhaps five or ten dollars a share in the active speculative issues, are chiefly psychological. They result from varying attitudes of the public mind, or, more strictly, from the mental attitudes of those persons who are interested in the market at the time.
Such fluctuations may be, and often are, based on “fundamental” conditions – that is, on real changes in the dividend prospects of the stocks affected or on variations in the earning power of the corporations represented – and again they may not. The broad movements of the market, covering periods of months or even years, are always the result of general financial conditions; but the smaller intermediate fluctuations represent changes in the state of the public mind, which may or may not coincide with alterations in basic factors.
To bring out clearly the degree to which psychology enters into the stock market problem from day to day, it is only necessary to reproduce a conversation between professional traders, such as may be heard almost any day in New street or in the neighboring cafes.
“Well, what do you know?” says one trader to the other.
“Just covered my Steel,” is the reply. “Too much company. Everybody seems to be short.”
“Everybody I’ve seen thinks just as you do. Each one has covered because he thinks everybody else is short – still the market doesn’t rally much. I don’t believe there’s much short interest left, and if that’s the case we shall get another break.”
“Yes, that’s what they all say – and they’ve all sold short again because they think everybody else has covered. I believe there’s just as much short interest now as there was before.”
It is evident that this series of inversions might be continued indefinitely. These alert mental acrobats are doing a succession of flip-flops, each one of which leads up logically to the next, without ever arriving at a final stopping-place.
The main point of their argument is that the state of mind of a man short of the market is radically different from the state of mind of one who is long. Their whole study, in such a conversation, is the mental attitude of those interested in the market. If a majority of the volatile class of in-and-out traders are long, many of them will hasten to sell on any sign of weakness and a decline will result. If the majority are short, they will buy on any development of strength and an advance may be expected.
The psychological aspects of speculation may be considered from two points of view, equally important. One question is, What effect do varying mental attitudes of the public have upon the course of prices? How is the character of the market influenced by psychological conditions?
A second consideration is, How does the mental attitude of the individual trader affect his chances of success? To what extent, and how, can he overcome the obstacles placed in his pathway by his own hopes and fears, his timidities and his obstinacies?
These two points of view are so closely involved and intermingled that it is almost impossible to consider either one alone. It will be necessary to take up first the subject of speculative psychology as a whole and later to attempt to draw conclusions both as to its effect upon the market and its influence upon the fortunes of the individual trader…