Posts filed under “Psychology”

Game Theory for Bulls & Bears

“Capitulation” is the term used to define a selling climax that often marks the bottom of a bear market. It translates into “surrender” — giving in to the overwhelming need to just make the pain stop. Retail brokers tell tales of individuals bailing out, often saying things like, “Just sell, get me out, please make it go away.”

We also can see capitulation at a market top, where bears throw in the towel, finally flipping bullish after missing out on too many gains.

Based on the recent market action — a mere 3 percent below a record high — bulls shouldn’t be capitulatory. We don’t see the usual indicators of a market top. Yet some of the commentary accompanying the retreat from these highs sounds more like an admission of defeat from the bulls than a victory lap. Listening to BubbleTV, reading commentary from respected bears, hearing the war cries of those who haven’t enjoyed the gains can be a bit confusing. The bulls seem sheepish and cowed, the bears emboldened and self-confident.

How can this be?

Perhaps game theory can help us explain this disconnect. The bulls don’t want to look stupid. Having been right for a number of years, they seemingly fear making optimistic pronunciations that get them tagged right at the top. The bears, meanwhile, having been wrong for this entire rally, have nothing to lose by doubling down on their past wrong predictions. If you have missed triple-digit gains, what does missing another 20 percent or 30 percent matter?

Five years into a rally in which markets are up more than 175 percent should cause both sides to reconsider. Some money managers are doing this already. As I noted yesterday, a rotation is underway. The wilder, hot names have been sold aggressively, and the old techs — Qualcomm Inc., Microsoft Corp., Intel Corp., Cisco Systems Inc., Oracle Corp. — are doing relatively well. The newer names — Tesla Motors Inc., Netflix Inc., Facebook Inc., Twitter Inc., LinkedIn Corp., SolarCity Corp. — have all been punished for their high price-earnings ratios and lack of dividends.

If you have been long during most of this bull market, you may want to consider rebalancing your portfolio to reflect the profits in the equities with the biggest gains. If your tech holdings have gotten shellacked, consider owning a mix of both the high fliers along with the more conservatively priced equities.

What if you missed the move up? Retail investors should reassess based on a few well-defined principles that I have described at length in the past.

I also really like this advice from Jeff Saut, the chief investment strategist at Raymond James, which manages more than $400 billion. He tells of a tactic from one of his favorite bears: After anticipating a major correction, this money manager found himself holding excess cash. Rather than trying to pick a single point to jump back in, his approach is mechanical. With each 3 percent gain in the Standard & Poor’s 500 Index, he invests 1 percent of his cash in stocks on the long side. If the market continues to rally, he gets slowly dragged back to the right side of the trend. If the market is near a top, he has only risked a small percentage of his cash.

Whether you are fully invested or all cash, you should have a plan that allows you to self-correct if the market proves your posture wrong.


Originally published here

Category: Cycles, Investing, Psychology, Rules, Trading


“Markets crash all the time. You should, at minimum, expect stocks to fall at least 10% once a year, 20% once every few years, 30% or more once or twice a decade, and 50% or more once or twice during your lifetime. Those who don’t understand this will eventually learn it the hard way.” -Morgan…Read More

Category: Markets, Psychology

Irrational Non-Exuberance

The endless chatter of bubbles and crashes continues unabated. Eventually, all bull markets come to an end, and this one must eventually as well. But as I sit down to write this, the Standard & Poor’s 500 Index yesterday hit yet another all-time high. U.S. markets continue to have good internals, strong breadth and broad…Read More

Category: Investing, IPOs, Markets, Psychology

Visual storytelling

The presentation offers standard and interlinked visual charts to help authors generate story ideas and write them with consistency and reliability. I hope that these charts shall help authors to do more unswerving writing with fewer efforts. Readers are invited to comment, add slides and criticize so as to upgrade the presentation. Visual storytelling from…Read More

Category: Digital Media, Psychology

Shiller: On Bubbles & Busts

In an interview with contributor David Wessel, Yale economist Robert Shiller describes his thoughts on what actually drives markets—and recalls his encounter with Alan Greenspan just before the Fed chairman’s “irrational exuberance” speech.

Category: Psychology, Valuation, Video

Crafting Visual Stories with Data

Data visualization has enabled us to compress data and express them visually in many interesting new ways. It is often cited that we are trying to tell stories through them. Is that really the case? How can we ensure that the audience is able to retain, recall and retell our data-driven stories. Using examples and…Read More

Category: Digital Media, Psychology

Psychology Charts & Sentiment Cycles (Updated)

We are overdue for an update of these charts. (See also Economic Cycles):   Bubbles and Manias Source: Jean-Paul Rodrigue, Dept. of Global Studies & Geography, Hofstra University ~~~ ~~~ ~~~ Gartner: Hype Cycle for Emerging Technologies Source: Gartner August 2013 ~~~ ~~~ ~~~ ~~~ ~~~ ~~~ ~~~ Real Estate Cycle of Sentiment ~~~  

Category: Cycles, Psychology

Behaviorally Informed Financial Services Regulation

Category: Psychology, Regulation, Think Tank

Where Are We in the Bubble and Mania Cycle?

Bubbles and Manias Source: Jean-Paul Rodrigue, Dept. of Global Studies & Geography, Hofstra University   Josh Brown reminded us yesterday of this terrific chart from Jean-Paul Rodrigue, a professor in the department of global studies and geography Department at Hofstra University. Of course, the key question is: Where are we on the chart? My view…Read More

Category: Cycles, Markets, Psychology

State of Love and Sex in Single America, the world’s largest dating site, has released its annual Singles in America survey.’s Helen Fisher and Justin Garcia discuss what over 5,000 singles have to say about the state of love and sex in America today.

Category: Psychology, Video