Wednesday, 27 August 2014

How high can we fly? and the psychological development of markets

Little has happened to my portfolio since the last post. That is to say ups have been balanced by downs. The main change has been a pause for breath by the dragons of my UK portfolio and nice run up by my China/US shares. They are now up by almost 3.5% in just under a month. (If that went on for a year it would be 42%). Big if, but still a nice reflection on my share picking given that the US market has seen much less than 1% move in the same period and there has been a 2.5% fall in the Chinese market.

Conclusion: steady hand on the tiller.

The evolution of bull and bear markets

Crowd Money draws a parallel between the emotions of the market and those proposed by psychologist to describe bereavement.
  • as the market moves from one wave to the next, first there is disbelief. The mood of the vast majority
    of the market crowd is that the last move, up or down, will not end. It is only the very brave that will take contrary positions and they are derided as delusioned mavericks. They find it hard to stand out and the positions they take are small reflecting the perceived level of risk.
  • acceptance  follows as people begin to make money and take ever larger positions. This is the period when buy and hold strategies yield good returns.
  • growing profit balances, encourage the view that the trend will never end and euphoria takes over. Price appreciation is seen as a certainty and large positions, including those financed by margin are taken on. The crowd rushes on oblivious to risk.
  • eventually demand, or supply is exhausted and the market begins to turn. Positions are liquidated as stops are hit and we move into a new period of disbelief.
  • renewed acceptance follows. It is important to note that the fear engendered by a falling market is a more powerful emotion than the greed that fuels a rising one. So prices fall faster in a bear market than they rise in a bull
  • following the sharp fall of the bear a period of depression follows when the crowd cannot believe that we shall ever see a recovery.

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