Why You Win or Lose: The Psychology of Speculation by Fred Kelly
Whenever the Wall Street boys have given me back a little more than I entrusted to them, I think it was because, having an insatiable curiosity about what human beings are likely to do.
I have looked at the stock market in terms of crowd behavior.
The way to win is to do exactly the opposite from what nearly everybody else is doing. In other words, one must be contrary!
Yet I know, simple as this formula seems, few will ever follow it. Indeed, if many followed it, then it wouldn’t work. If everybody tried to buy when prices are low, then bargains would never exist. A few find bargains only because the majority never recognizes bargains. The crowd always loses because the crowd is always wrong. It is wrong because it behaves normally. Every natural human impulse seems to be a foe to success in stocks. And that is why success is so difficult? “If you think it is easy to do invariably the opposite of what seems to be the sensible thing that everybody else is doing, just try it. At every step, one is tempted to do that. Which seems logical, but which is nevertheless unwise. But of all this, more later.
The important part played by vanity in stock losses was still a sealed book to me. Neither did I understand why men are inclined to sell their good securities and keep poor ones.
I learned that men win or lose not so much because of economic conditions as because of human psychology.
Finding that the stocks people expected to go up almost invariably went down, I began to study the market to try to find out why. Was it because people were inclined to buy poor stocks or because they merely bought good stocks at the wrong time? I convinced myself that it was good stocks bought at the wrong time far more often than hopelessly poor stocks. To my astonishment, I learned that it is almost as easy to lose money on good stocks as on poor.
I learned that it is of no value to know that a stock is comparatively cheap unless one knows also whether it is cheap on the way up or on the way down.
It is vanity that leads us to take small profits but large losses. If you see a nervous, fidgety man, evidently not quite sure what to do, he is probably trying to make up his mind to sell and thus cinch a small profit before his vanity is in jeopardy.
It is vanity that makes men sell good stocks and keep poor ones in time of distress. They won’t sell the poor ones, because these represent a loss; but they dispose of the gilt-edge things which stocks show a profit, the very ones which would eventually make up the losses. Of this we shall say more in a later chapter.
The speculator whose vanity gives him sublime faith in something he has heard does not use his reasoning powers; at least not until his money is all gone.
Not every optimist is a sucker; but most suckers seem to be optimists. However, once fear has been induced it works more quickly than does enthusiasm. Consequently stock prices go down much faster than they go up!
Greedy people who sold on his advice before the price was reached will never forget about the money they think they might have made.
One of the keenest men in Wall Street told me that there are seldom more than two or three times in any one year when one should buy stocks.
FEW can sit back and wait for bargains. Greed is an enemy of patience.
The worst losses in the market come naturally from buying stocks when they are too high priced.
We think to be true whatever we hope is true.
I have seen men earnestly listening to the advice of a broker’s colored porter—because he was telling what they earnestly desired to think was true.
Why You Win Or Lose: Beware of mental accounting. Spending profits
Where being illogical is wisdom.
Most men who enter business eventually fail because of their inability to be successful buyers and sellers.
The few who contrive to take more out of the stock market than they put into do so by going contrary to what would be generally accepted as logic. They do the opposite to what the majority of seemingly intelligent specs are doing.
The most logical thing a market speculator can do, indeed, and the thing he is most likely to do is to buy when prices are high, and sell when prices have dropped, thus suffering a loss. Unwise as this is, it is nevertheless logical, because when stock prices are highest all the information drummed into ones’ ears is favorable, indicating that soon they will be still higher.
It is this disposition to expect a stock to continue in the same direction that it has been going which leads people to buy at top prices after several days’ rise, or to sell after several days of decline.
But the day you sell is reasonably certain to mark the end of the decline, because you are not the only one who has finally scared into selling.
The stocks which advanced in price probably did so because of their merit, because of expanding business in the corporation they represent. They are therefore the ones most likely to keep on advancing.
Yet experience has shown that to follow a broker’s market letters or verbal advice is to take the road that leads to the almshouse.
To begin with, a broker is rarely by nature a scientific student of stock fluctuations, but more probably only a fellow who lives by his wits and follows mere surface indications.
The biggest bear is a sold-out bull. Beware of prejudices.
If you are logical you merely do what everybody else is doing. You can make a profit in the market only by outwitting the majority of other people. But you can’t do that if you forget long after they forget that it also had a former low price.
Don’t follow the same plan that they do. In a later chapter we shall try to determine what, if anything is the answer.
Wise men do not buy a stock until has been through severe tests and shown an unwillingness to go any lower. But most of us are too impatient to wait for a stock to show its mettle and consequently we are a great help to the pools (a group of manipulators hired to influence stock prices).
When a stock drops sharply and actively to the lowest price in a long time, but during three months thereafter fails to go still lower, then it is probably going, not lower, but higher.
Since, as we have seen, the natural behavior of the average person is likely to be wrong, and powerful interest are constantly at work to lure one into acting unwisely, what is one to do?’
Fortunately, as already suggested, there is one fairly safe guide to prudent procedure—to do exactly the opposite from what the majority of other people are doing. If one would win he must be contrary.
The mass of