The psychology behind retail investors chasing up and down!
Before, I always wondered why, the higher the price, the more base (stock) people bought. And the cheaper it is, the base (stock) people are instead taking out. Here we leave the case alone.
The simplest example, we can see from the volume of the stock market.
More intuitive, you can read our previous article “Fund Annual Report, pay attention to these points is enough! “The example of SDIC UBS New Energy Hybrid A.
In the case, most of the investors increased their positions near the periodical highs of their net worth, resulting in a cycle of “funds make money and Christian Democrats lose”.
From the data, this is a very typical case, but it is also very common.
Thinking about it, from a common sense point of view, shouldn’t it be cheaper to buy more and sell it when it is expensive.
Why does it become “buy up and not down” when it comes to the capital market, or the investment field (such as the real estate market).
After thinking and discussion by another blogger, his sentence woke me up:
The money we are making now is actually arbitrage by long-term investors to short-sighted ones.
And listen slowly…
Before reaching this conclusion, let’s introduce a common thinking in investing – linear extrapolation.
Linear extrapolation is a common misunderstanding in investment.
The thinking pattern is: it has risen in the past – predicting that it will rise in the future, so buy.
And with it: When it goes up, the market will give a lot of reasons to go up.
For example, we are using a discounted cash flow model, and the current valuation is not expensive in terms of growth in the next ** years. Even with a pullback, I believe the strong performance will digest the valuation.
For example: the Internet will change all mankind! This time is different!
These upside reasons motivate you to keep buying.
Buying is often accompanied by “positioning thinking”. In layman’s terms, “butt decides head”, because you buy this target, you tend to accept some remarks that it will rise, and filter out those unfavorable remarks intentionally or unintentionally, so that you are more determined to hold or buy. Confidence.
Looking back now, the Internet has indeed changed the world, but the US stock Internet at that time still could not escape the fate of the bubble burst.
Again, there are many reasons for the decline when it falls. The economy is not good, the impact of the epidemic, local turmoil, interest rate hikes in US stocks, the previous sweater friction, deleveraging, etc., each of which is enough for you to sell.
As my mother told me before, there is a war, so quickly sell the fund!
In a bear market, you are also “intimidated” by various “this time is different” remarks. In addition, the market is indeed falling, and your confidence is constantly being worn away. Finally, you can’t bear to sell. If everyone has similar thoughts, it will cause the market to fall further and create a negative cycle.
Speaking of this, I can’t help but think of the book I recently re-read – Howard Marks “The Most Important Thing in Investing”. There is a paragraph in it.
A forced sell occurs when a stock market crash causes leveraged investors to receive margin calls and to close their positions; when cash flows into mutual funds, portfolio managers need to buy. In both cases, people were forced to trade securities without regard for price .
Trust me, there’s nothing better than buying from someone who has to sell regardless of price during a crash . Many of our best deals are made at times like these. However, I would like to add two points:
Coercive sellers and coercive buyers do not exist all the time, they only emerge during rare extreme crises and bubbles.
Since buying from a forced seller is the most wonderful thing in the world, being a forced seller is the most miserable thing in the world.
So, it’s important to get your business in order so that you can hold on (and not sell) through the toughest of times. To do this requires both long-term capital and strong psychological qualities.
From this, I thought of forced buying and forced selling of public funds. When the net value continues to rise, Christian Democrats subscribe frantically, and fund managers can only passively buy with funds. However, due to the circle of competence, scale and other reasons, most fund managers can only increase positions within a limited range. At this time, fund managers may not I don’t think these targets are cheap, it’s a “compulsory buy”.
Forced selling, think about 2018, how many funds had to sell high-cost stocks due to a large number of redemptions by Christian Democrats.
In line with the first point. Short-term linear extrapolation leads you to “follow the crowd” trading decisions. And most are short-sighted .
It has risen in the past – predicting that it will rise in the future, so buy.
This includes the psychology. Others buy it up and buy it to make money. I don’t think I will fall when I buy it. But in fact, most of the feeling is to buy and fall. Why?
Because the periodic highs are usually in the trading-intensive area, most of these high-level chasers buy under the influence of making money around them. With “reversion to the mean”, a pullback after a sharp rise is inevitable.
The final state is likely to be:
People with short-term thinking: profit in the short term, and loss in the long term with “reversion to the mean”.
People with long-term thinking: short-term losses, also with “mean reversion”, long-term profits.
This is “people with long-term thinking arbitrage short-sighted people”!
The above is an example of “buy”. “Sell” is the opposite.
When the market falls and becomes cheap, A who “sees the short and the short” thinks that it will still fall, sells it, and B, who “sees the long and becomes the elder”, buys.
The market did continue to fall. A glad to sell.
Regarding falling and selling, I have also seen an explanation, which is genetics.
From the perspective of evolution, human beings will instinctively be afraid and flee when they encounter danger. Therefore, when the market is constantly falling, people’s instinctive reaction is to quickly sell to avoid danger.
In other words, the avoidance of risk is inscribed in the genes. This is why people often say that investing is against human nature.
On the other hand, B, who sees the value, is buying more and more (note here: individual stocks and some industry bases with value traps are not necessarily applicable), the cost will be lower and lower, and when the market picks up, it will soon unwind and make a profit.
There is a key point here, and that is the value judgment .
The premise is that the investment target is cost-effective for investment. First, it is cheap and has investment value; second, it can get up in the future.
As for the history of active funds and broad bases, it is very likely that they will hit a new high in the future.
This also includes things such as fear, greed, delayed gratification, value recognition, and the pendulum effect.
that’s all.
About the author of this article: Author of the book Index Fund Investing from Beginner to Master. How to choose a base? When to buy? When to sell? For more fund investment knowledge, practical skills, and in-depth analysis articles by well-known fund managers, please pay attention to Ben Xueqiu: Not in this mountain
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