Investigation into Securities Accounts Reveals Truths! The Real Reason Why the Majority Suffer Large Losses
Hello, this is Kaoyama (Shimoyama).
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Investing is a beauty contest.
Select photographs that are beautiful in appearance
and award the prize to the one whose style most closely matches the average preference of all voters.
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This is a famous claim by economist Keynes, but
“What do the average investors think and
how do they act?”
If one can grasp this clearly, it would give a big clue in investing, right?
Of course, it's not easy to know what others are thinking,
which is why investing is difficult...
But, humans have instincts,
and these are common across people living in any era.
Therefore, if you could understand such human instincts at a high level,
there would be situations where you can read
the average behavior of other investors.
When certain conditions align,
you can see, with a fairly high probability,
“what kind of actions many people tend to take.”（not perfect, but）
you can often predict it quite well.
But those who simply stare at charts, grind their nerves to the bone,
and yet see no profit may want to try turning their attention to
“human instincts” behind the market.
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Human instinctive behavior
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Now, how do people tend to behave
in different situations?
I will introduce one concrete example.
Actually, there are clear differences in personal traders’ actions when stock prices rise
versus when they fall.
When stock prices are rising and when they are falling,
the psychological state of individual investors differs considerably,
so you can probably imagine it, right?
“When stock prices rise and when they fall,
what kinds of differences arise in the actions of individual investors?”
Please read on while recalling your own behavior.
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When stock prices go up, the frequency of that action increases
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What I will introduce is Sweden’s
business information management expert Niklas Karlsson,
Carnegie Mellon University behavioral economist
George Lowenstein,
and also Carnegie Mellon University
finance economist professor Duane Seppi, who conductedresearch.
Those are some impressive names lined up, aren’t they?
But don’t worry, it’s not a difficult story.
The conclusion is simple.
In their research, they found a clear correlation between stock prices and
one particular number.
That “number” is the frequency with which individual investors perform a certain action,
and what kind of frequency is it, you may ask?
It is the frequency of logging into brokerage accounts..
When stock prices rise, login frequency increases,
and when prices fall, login frequency decreases.
The study used data from January 2006 to April 2008
on the movement of the S&P 500 and individual investors’ login information,
and what kind of correlation was observed?
I will quote a section that explains it in detail.
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What is obvious is that the two lines move up and down together,
like lovers walking a hill, hand in hand.
When the market rises, people log in incessantly,
and when it declines, they avoid checking stock prices.
Why is that?
After statistically controlling for other factors and possible explanations,
the research team reached a conclusion.
The act of gathering information about the value of holdings is driven by a desire for satisfaction.
When the market trends up,
people think their holdings will follow suit and access the information to savor good news.
When the market trends down, people choose to look away from reality.
Because they know there is a possibility of losing wealth,
and seeing it would be demoralizing.
Tarli Charlotte
“Facts Why People Can't Change Their Minds”
Aug 30, 2019 First Edition First Printing
P.148-149
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In short,
“The majority of ordinary individual investors are ruled by their emotions.”
They oscillate emotionally with stock price movements.
In favorable situations, even when they don’t intend to trade,
they repeatedly check stock prices,
and in unfavorable situations, they avert looking at numbers that upset them,
that is the truth of the average individual investor.
In this way, what future awaits emotion-driven investors
you know, right?
“Exit from the market” is all there is to it.
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So, do you, Shimoyama, get swayed by your emotions?
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The story I just introduced is about whether to log in or not,
so, even if you know this, it may not greatly benefit your trading.
There may not be
a significant advantage just from knowing this.
But
“If the majority of individual investors are controlled by their emotions and eventually fall apart,”
understanding this truth can help you see what you should do.
Wouldn’t you agree?
Yes, what you should do is
free yourself from being driven by emotions.
Stock prices rising makes you happy, falling makes you sad.
It is obvious, but
if you want to keep winning,
you must avoid that state.
As long as you are driven by emotions, there is no victory.
“So, is Shimoyama not swayed by emotions?”
People may ask, but in my case
I don’t have much of a desire for material things.
Therefore, the emotional ups and downs during trading
may be less than others.
Of course,
I don’t feel nothing at all.
But, even so, I don’t trade while being driven by emotions.
Because, whether prices rise or fall,
there are profits to be made.
I’m not fighting in a world of right or wrong choices,
so essentially,
whether prices go up or down,
it doesn’t matter to me.
I hope today’s talk will be useful for your trading.
Keizo Shimoyama
