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The psychology of the stock market: when to buy

Hi lucio you are very good with people and psychology and the stock market is a lot about psychology, social pychology and even power dynamics. what do you think is happening now in connection to the pandemit and when is it a good to buy?

Very quick thoughts:

The psychology of the stockmarket starts with the overconfidence bias.

I have no idea when it's a good time to buy and I tend to trust little those who tell you what's going to happen or when it's the right time to buy.
The truly successful guys -ie.: Warren Buffet, Ray Dalio-, are the first to tell you they have no idea. Ray Dalio made his "I have no idea" the main recipe to his billion-dollar success. He analyzes better than anyone because he built systems that are independent from any single person's hunches and feelings. And even then, he still never fully trusted his firm's forecasts.
He foresaw the 2008 financial crisis, gain handsomley from it but not hugely. Why not? Because he didn't go all in and preferred hedging his positions (the guy is a genius by the way, I love him and respect him a lot).
Compare it to smaller fishes like John Paulson: Paulson became the most famous investor of the last decade. He trusted himself, bet big, and he won big. But his mind was not in the right place. His bets were bests, based on trusting himself. And he then proceeded to lose a lot of money in his successive bets because he trusted his own opinion too much -and that in spite he was close to the elites of power thanks to his backing of Trump-.

That being said, I think the stockmarket underestimated the virus for quite some time.
I cannot see how this isn't going to have a big impact on many companies' bottom lines: when the biggest economies "lock down", production decreases and some sectors and businesses stop altogether (travel, entertainment, some services, some production sites, etc.), we are bound to see a major slowdown. How big that slowdown is going to be depends on how long we remain in "lock-down mode".

Now the question is: will this be a quick one off?
If the virus is a one-off bell curve, it might also be a one-off slowdown. If we manage to "flatten the curve", it might last longer, but the impact will also be smaller.
If we will have a few waves, then we might see this same scenario repeated a few times, but some epidemiologists say the next waves might be milder -and they won't last for ever anyway-.

Eventually, we'll get over it.
But the fact that we'll get over it doesn't necessarily mean that buying now is a surefire way of gaining once we put the virus behind.
The worlds' equities have been going through a bull cycle for many years now, and booms and busts are cyclical. It's possible that the coronavirus is going to be the catalyst for a new bearish cycle and we will not go right back to the levels we were right before the virus.

You're right though. Trading has a lot to do with psychology and social-psychology. And people tend to overreact to bad news and overbuy on good news. So, yes, in principle it makes sense to dial up your interest in stocks during panic time.
Warren Buffet said it already: be greedy when everyone is fearful.

Personally, I am adding a few ETFs to my watch list.
But most of all, I wish people stay safe. I'd gladly throw the opportunity to buy stocks away if it could mean we're going to get better quicker.
Stay strong and safe first. Cheers.

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Hi everyone,

I don't know if you have already seen this story on how billionaire investor Bill Ackman went about investing in the stock market in these crazy times, but I couldn't think of a better forum to post about this on.

"10 days ago, legendary hedge fund manager Bill Ackman gave a now-infamous CNBC interview in which he was on the verge of crying for 28 minutes as he warned viewers that 'Hell was coming' to the world’s economy because of the coronavirus. He said the stock market could be ruined for years as an effect of the virus and that stocks like Hilton could potentially fall to zero. As he spoke the market tanked more than 2,000 points.

What he didn’t mention during his rants of panic was that his firm had placed a $28 million bet that the market would fall one week earlier. One week after his interview he exited his short positions essentially cashing out on his bet after the stock market collapsed. The fall in the market turned the $28 million into $2.6 billion. That’s nearly at 10,000% rate of return in 2 weeks.

The firm has since used that money to buy stock in Hilton, Berkshire Hathaway, Restaurant Brands International, and Agilent.

Many people are now saying that his TV appearance was a play to drive stocks down so his firm would profit. This isn’t the first time he has been under the microscope; in 2015 he was investigated by the United States government for stock manipulation."

***, talk about a power move :). I said in another post that this quarantine could be a great opportunity to grow your personal power and as unethical as this might have been, Ackman definitely set the bar high. It's moments like these that I'm all the more grateful for Lucio's blog and Social Power course.


Ali Scarlett

Oh man, what a next level POS :S

Thank you for sharing this Ali, a powerful reminder that:

  1. You don't trade following the noise (TV-shows, big titles, high emotions, etc.)
  2. Psychology in an important component of the stock market, and it takes over during times of (financial) crisis
  3. There are people who are out to cheat and steal -and the fact they're famous or in TV does not reduce those odds-
Have you read the forum guidelines for effective communication already?

Quick bump on this one:

In hindsight, it turned out to be a good time to buy stocks.

I confirm that I consider "shock-times" an interesting period to look at stocks when one has plenty of liquidity.
The rationale is that people tend to focus on the short-term and the news, overestimate the risks, and don't take enough of a long-term horizon.
Albeit, of course, they're not a surefire way of gaining (there is no such a thing as a surefire way of making money without taking some risks, unless we're talking of rigging some systems).

It's interesting to note how the major averages differed.
US equities didn't go down nearly enough compare to other stockmarkets.

This is a chart comparing the German DAX and the Turkish Titans' 20, which was one of the ones I was observing:

American equities lost comparatively less.
Maybe it's because Americans' risk appetite is historically higher than most other countries?

Can't say, but the general principle I follow in these situations is to keep an eye on several markets, and I am more interested in the more battered market.


Because the shock is global.
So, in principle, the markets that go down the most are going down the most on feelings and emotions, not on real fundamentals.

If the world pulls through, as it likely (but not necessarily) would once a pandemic is past, the whole world pulls through, and the most battered stock markets are also more likely to bounce back more than the stock market that barely budged.

There are obvious limitations and risks to this approach.

It does not take into account country-specific issues or other risks they might be running, for example. So take it with a big pinch of salt.

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