E Mass Psychology And Why The Average Joe Is Destined To Lose

Uncertainty and mystery are energies of life. Don't let them scare you unduly, for they keep boredom at bay and spark creativity.
- R. I. Fitzhenry

The average person regardless of their education, or lack of,  usually is on the receiving end of the stick when it comes to investing in the markets. The reason for this quandary is really very simple and predicated upon the fact that the average person’s decision-making process is driven by his or her emotional state. Successful investing and emotions do not go together; it’s an awful mix, and the outcome is always the same: stress and loss.    

For this example, we are going to use a chart of the Nasdaq to provide an illustration of how emotions drive the average investor when it comes to trading and investing in the stock market.  The same principles described below apply to all the other major indices such as the Dow, SPX or major stocks such as GOOG, AAPL, WMT, etc. The diagram below clearly and effectively illustrates the dilemma and uncertainty the average investor inflicts upon themselves. The solution is dangerously simple, but its simplicity is what makes it so hard for the crowd to implement.  One needs to throw one’s emotions out of the window when it comes to investing. Emotions should have no seat at the discussion table when it comes to buying or selling a stock.  Successful investing entails doing the opposite of what your useless emotions are so dramatically prompting you to do. There is simply no place for any extreme deviation from the norm when it comes to investing and euphoria and panic are extreme deviations from the norm.

Riches come to those who seek it and not chase it. To those who chase it, rags are the only reward.  The world can be your oyster, or you can be an oyster in the world.   

Click on picture to enlarge

Chart of Nasdaq (COMP) illustrating the small investor almost always loses in money in the stock market

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Brian Green 3 years ago Member's comment

Great article, as someone who has just begun his investment journey, you have given me a lot of food for thought. Thanks again for taking the time of simplying the concept of mass psychology and investing

Jonathan Maree 3 years ago Member's comment

Brilliant article!! As a novice investor, I can identify with each one of these stages. I have, however, made a firm decision to fight my emotions and stay invested for the long term despite the extreme market volatility.

Tactical Investor 3 years ago Author's comment

Thank you. The most difficult part is to identify the problem. Once the problem is identified finding the solution is rather easy. Most traders do not even bother to consider how dangerous uncontrolled emotions are when it comes to investing and hence a solution is never found to this simple problem.

John Ayres 3 years ago Member's comment

I recognize all the stages of elation, fear and loathing, but it is much less clear about an approach free from fear, greed etc.. This would have to be mechanical in nature.

And what about the persuasive arguments that no approach is possible, e.g. "if a method ever existed, the casino would have to close as all money moved to the winner", or, " the price this instant already contains all and more information than you could ever bring to bear on the problem"

Personally, I feel that if I removed my emotion, hubris and drive, I would have no motivation left other than to do treasuries, and I would recognize that I could not possibly beat the efficient market.

Tactical Investor 3 years ago Author's comment

John one of the ways it to monitor sentiment and be patient. For example, in the not too distant future Gold and Energy stocks will make good long-term investments. The adage to buy when there is blood in the streets was not coined without reason. If you can couple sentiment analysis with technical analysis you will be miles ahead of the average joe. There is one thing to have the emotions you speak of, but it is quite another thing to let them be the drivers behind your decision-making process when it comes to the markets. However, if you simply look at history, it is replete with examples illustrating how when the masses fully embraced an investment, a top was not far in the markings and vice versa

John Ayres 3 years ago Member's comment


Vladimir Bajic 3 years ago Member's comment

Excellent post. I love the way you added humour to illustrate the mistakes the average Joe makes when it comes to investing :)

Tactical Investor 3 years ago Author's comment

We think individuals who always focus on the gloom doom scenario must be lacking in humour. A bit of humour always helps ease the tension and perhaps makes the concept easier to understand. The concept in this article is very easy to understand, the problem is implementing it