Newsletter
April 7, 2007
Don't Quit
Market & Sector Review
Psychology of the Masses
Largest Changes In Raw Numbers (21 Days)
This Week's Economic Reports
Next newsletter will be April 28, 2007. My youngest daughter will be traveling to Disney with her high school girls softball team for a little practice and a lot of park visits. My wife, I, and other family members meanwhile will spend the time lounging on the beach. Members area will be updated through April 11 (including Trading Notes), as we leave on the 12th. The next update will be sometime over the weekend of the 21st or 22nd.
Don't Quit
This Week By: Vic Johnson
"Your circumstances may be uncongenial, but they shall not remain so if you only perceive an ideal and strive to reach it. You cannot travel within and stand still without." - As A Man Thinketh
For many years I have carried around a poem called Don't Quit. One of the lines says, "stick to the fight when you're hardest hit - It's when things seem worst that you mustn't quit." In our darkest hour it's hard to see the end of our circumstance. All we can think of is our conditions worsening. But it's usually at this time that our greatest growth can occur if we'll see the moment as a growth opportunity. If we'll see it as a time to learn how to control our thoughts toward an ideal that we cherish.
One thing I share with people who seek my advice when they think their life has come apart, is to help them understand the power that even the tiniest of actions can have when taken in a negative situation. Remember in Science class when we learned that "a body at rest tends to remain at rest or a body in motion tends to remain in motion." This is especially true when overcoming circumstances because "paralysis" usually keeps us in the condition longer than we'd like.
But even more important, is that once we've started in motion, even though it may not seem like much, know this - it's now only a matter of time before you're out, totally out, of the situation that has got you down today.
My long-time favorite poem by an anonymous author is worth remembering today:
When things go wrong as they sometimes will,
When the road you're trudging seems all uphill.
When the funds are low and the debts are high,
And you want to smile, but you have to sigh.
When care is pressing you down a bit,
Rest if you must, but don't you quit.
Life is queer with its twists and turns,
As everyone of us sometimes learns.
And many a fellow turns about,
When he might have won had he stuck it out.
Don't give up though the pace seems slow,
You may succeed with another blow.
Often the goal is nearer than
It seems to a faint and faltering man.
Often the struggler has given up,
When he might have captured the victor's cup.
And he learned too late when the night came down,
How close he was to the golden crown.
Success is failure turned inside out,
The silver tint of the clouds of doubt.
And you never can tell how close you are,
It may be near when it seems afar.
So stick to the fight when you're hardest hit,
It's when things seem worst that you mustn't quit.
Courtesy of Vic Johnson - Download a FREE E-Book "As A Man Thinketh"
Market & Sector Review
Psychology of the Masses
Throughout history there have been mania's and bubbles which have led to financial ruin to many of the masses that participated. I believe it is only through a study of history that we can become prepared for and avoid the temptations of the madness of crowds.
In any bubble environment, greed runs amok and that is the essential feature that feeds the bubble environment. In their frenzy for money, market participants throw out all logic and foundations of value, for the dubious assumption that they too can make a killing. This kind of thinking, this kind of action has enveloped entire nations, including but not limited to the U.S. The psychology of the masses during such speculative frenzies is a veritable theatre of the absurd.
Charles Mackay's famous book, "Extraordinary Popular Delusions and the Madness of Crowds", is perhaps the most often cited in discussions of market phenomena, from the tulip mania in 17th-century Holland to most every bubble since. The story is a familiar one: an enduring bull market in some commodity, currency or equity leads the general public to believe the trend cannot end.
What is it that makes a collection of calm, rational individuals become overwhelmed by emotion? Those who study human nature have repeatedly found that the fear of missing an opportunity for profits is a greater motivator than the fear of losing one's life savings. Memorize that sentence! I have personally seen quite a few financially destroyed, because they have succumbed to this motivation. This fear of being left out or failing if you will, when friends and relatives seem to be making a killing, drive the power of the masses.
Another motivating force is the delusion that many believe the majority must be right. Nothing could be further from the truth. Horse racing provides a classic example; the favorite horse in a race, the one the public fancies and bets money on, wins less than one in three races, i.e. the majority is wrong two of three times. A widely followed market guru is an example of the type of individual who purports to stand as all-knowing leader of the crowd, but whose façade is the first to crumble when the tides of the mania eventually turn (this statement has in mind a specific popular individual, but no names here).
Most traders are aware of the overwhelming power of crowd psychology and the simple fact that trends in force have a tendency to continue on the basis of strength. This presents a conundrum to the individual trader: do you follow the strength being brought upon by the crowd or do you strike out with your well-analyzed decision, thinking it will prevail? The answer can actually be quite simple; follow the crowd when your opinion jives and cut your losses when the crowd turns against you.
The key I believe to enduring success as a trader is to develop your own individual and independent of others, methodology, and follow a highly disciplined implementation and risk strategy. If your analysis and the crowd are in alignment a very profitable trade or trades can be earned in the short to intermediate term. However this is also the most potentially dangerous situation in the intermediate to longer term. You cannot afford to be lulled into a false sense of security by giving increasing credence to the decisions of others.
Eventually the crowd's behavior will diverge from your analytical approach, and this is the precise time at which a trader must put on the brakes. It is probably the single most difficult time to exit a winning trade as our emotions suggest to us that the move will never end and we begin calculating what our net worth will be next week. It is very easy to second guess the analysis you are doing and go for just a little more. However its almost always the case that straying from your system may be fruitful over the very short term, however in the long run the individual, disciplined, analytical approach will win out over blind adherence to those around you.
The feeling that you are missing out is the most psychologically trying and dangerous situation that you are likely to face in your trading career. Remember what behavioral psychologists have found; the feeling of missed opportunities is more taxing than realizing losses. This is perhaps the ultimate paradox of trading, that our innate human instinct and desire to fit in with the crowd is also the situation that has led many an individual trader to financial ruin. Never fight the power of the crowd, but always be aware of how your individual decisions relate to the power of those around you.
Largest Changes In Raw Numbers (21 Days)
[ Reserved for supporting members, now posted in members area ]
This Week's Economic Reports
Have A Great Week!
Bill
Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.
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