Survey Of Retail Investors Shows The Blind Lead The Blind

While the advances in technology certainly provide many positives, they also breed behaviors that are an anathema to investor success longer-term.

An article in the Seattle Times noted the same:

“Online traders can experience a certain high when trading that is similar to what people experience when gambling, according to a recent study on excessive trading published in the journal Addictive Behaviors. The study noted that some investors choose short-term trading strategies that involve investing in risky stocks offering the potential for large gains but also significant losses. ‘The structure itself of the two activities (gambling and trading) is very close,’ the study concluded.”

In the current market environment, individuals have been fortunate to garner quick successes, making them overconfident in their actual abilities. Unfortunately, when the cycle turns, the losses mount just as quickly.

There is very little difference in today’s market between “trading” and “gambling.” Both hold the promise of significant financial rewards, but those rewards also come with great risk. That latter tends to get dismissed at the individual’s peril.

Selling Bottoms

No matter how committed people think they are about “buying and holding,” they eventually fall into the same old emotional pattern of “buying high and selling low.”

Investors are human beings. As such, we gravitate towards what feels good, and we seek to avoid pain. When things are euphoric in the market, typically at the top of a long bull market, we buy when we should be selling. When things are painful, we sell when we should be buying.

It’s usually the final capitulation of the last remaining “holders” that sets up the end of the bear market and the start of a new bull market. As Sy Harding says in his excellent book “Riding The Bear,” while people may promise themselves at the top of bull markets, they’ll behave differently:

“No such creature as a ‘buy and hold’ investor ever emerged from the other side of the subsequent bear market.”

Statistics compiled by Ned Davis Research back up Harding’s assertion. Every time the market declines more than 10% (and “real” bear markets don’t even officially begin until the decline is 20%), mutual funds experience net outflows of investor money.

Fear is a stronger emotion than greed.

Most bear markets last for months (the norm), or even years (both the 1929 and 1966 bear markets), and one can see how the torture of losing money week after week, month after month, would wear down even the most determined “buy and hold” investor.

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