Retail Investors Are Long Confidence And Short Experience

Long confidence short experience, Retail Investors Are Long Confidence And Short Experience

None of this is new, different, or unique.

The same thing happened in late 1999. That commercial aired just 2-months shy of the beginning of the “Dot.com” bust. As we see today, investors believed “investing was as easy as 1-2-3.”

Why this trip down memory lane? (Other than the fact the commercials are hilarious to watch.) Because this is typical of the exuberance seen at the peaks of bull market cycles.

Long Confidence

Along with David Dodd, Benjamin Graham attempted a precise definition of investing and speculation in their seminal work Security Analysis (1934).

An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

There is also a significant passage in Graham’s The Intelligent Investor:

“The distinction between investment and speculation in common stocks has always been a useful one and its disappearance is a cause for concern. We have often said that Wall Street as an institution would be well advised to reinstate this distinction and to emphasize it in all its dealings with the public. Otherwise the stock exchanges may some day be blamed for heavy speculative losses, which those who suffered them had not been properly warned against.”

It should not be surprising we see such rampant “speculative” behavior in the markets. After a decade of monetary injections, investors believe there is an “insurance” policy against losses. This insurance policy is most commonly known as the “Fed Put.”

It should not be surprising, since the “Fed Put” began following the “Financial Crisis,” it is primarily young investors lulled into that complacency. Armed with only a couple of years of investing experience and a fresh “stimulus” check, the “casino” is open.

Long confidence short experience, Retail Investors Are Long Confidence And Short Experience

Long confidence short experience, Retail Investors Are Long Confidence And Short Experience

 

Confirmation Bias

One of the signs that you have entered into a mania phase is when people have trouble absorbing non-conforming information. Confirmation bias” is a psychological behavior where individuals disregard any information which conflicts with their current beliefs. While that bias has always been problematic for investors, in recent years, it has worse as individuals lock themselves inside “social media echo chambers.”

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