a little reading material 4uHere is a research paper I put together 15 years ago. Interesting read if you wondering why fluctuations happen, and why you look at multiples / volume / sectors / overall economics
Cause and Effect in the world Economies:
By analyzing trends rhythms and movements growing from public statements of world financial leaders and decisions these leaders make.
Any idea of what the future will be like is by definition going to be biased and partial.
What beliefs do is alter facts. Distortion works in both directions... Not only do market participants operate with a bias, but their bias can also influence the course of events. This may create the impression that markets anticipate future developments accurately, in fact it is not present expectations that correspond to future events but future events that are shaped by present expectations = Reflexivity.
Markets are unstable. What cause market instability are our perceptions. More precisely our biased or flawed perceptions.
The prices investors pay are not passive reflections of value; rather, they are active ingredients in creating a valuation of the stock.
When events have anticipants thinking, the subject matter is no longer confined to facts but also includes the participant’s perceptions.
The role played by misconceptions or biases in shaping events; Means, misconceptions or discrepancy between the perceptions of the participants and the out come of events. Thoughts of the participants cannot just confine to facts, rather, you must take into account all participants. (You cannot predict what one person will do, if you have a crowd of people then you can predict the outcome). Because the thinking of the participants does not correspond to the facts, there is uncertainty. Because of this uncertainty, almost always one finds a discrepancy - not a correspondence - between the perceptions of the participants and the out come.
When the gap between perception and reality is wide, events often run out of control, a situation found typically in BOOM/BUST sequences. BOOM/BUST sequences are prone to develop because markets are always in a state of flux and uncertainty.
*The way to make money is to look for ways to capitalize on that instability, to search for the unexpected developments. TO IDENTIFY A BOOM/BUST SEQUENCE
-UNDERSTAND HOW OTHER INVESTORS PERCEIVE THE VARIOUS ECONOMIC FUNDAMENTALS.
-DETERMINE THE TOTAL # OF INVESTORS THAT THINK THIS WAY.HINT: VOLUME
-ONCE YOU KNOW WHAT THE MARKET IS THINKING, IT BECOMES POSSIBLE TO JUMP THE OTHER WAY, TO BET ON THE UNEXPECTED EVENT. TO BET ON A BOOM/BUST CYCLE IS BEGINNING.
(While most believe that financial markets lean toward equilibrium and discounted the future accurately, you have to assume that financial markets cannot possibly discount the future correctly because they do not merely discount the future: they help to shape the future.
BOOM/BUST CAN ONLY HAPPEN WHEN A MARKET IS DOMINATED BY A TREND-FALLOWING BEHAVIOUR. WHAT IS TREND-FOLLOWING BEHAVIOUR?
*Flawed perceptions of individual investors cause markets to feed on them selves. (Herd like mentality) - Always over react = BOOM/BUST SEQUENCE. *Recognize the point at which markets begin to feed on there own momentum, this will tell you when a BOOM/BUST SEQUENCE has begun or is in process.
The reason reflexive processes follow a dialectic pattern can be explained in general terms: The greater the uncertainty, the more people are influenced by the market trends; and the greater the influence of trend-following speculation, the more uncertain the situation becomes.
MAIN FEATURES OF BOOM/BUST SEQUENCES ARE:
1. The trend is yet unrecognized.
2. *Once that trend is recognized, that recognition tends to reinforce the trend and a self-reinforcing process begins. As the prevailing trend and the prevailing bias reinforce each other, the trend becomes more and more dependent on the bias. The bias grows more and more exaggerated. As the process develops the conditions for far-from equilibrium come into play.
3. The markets direction is successfully tested: both the bias and the trend may be tested over and over again by various outside shocks (news).
4. *Conviction increases; if the bias and the trend survive, acceleration occurs.
5. Reality and perception diverge; a stage arises when divergence between belief and reality is so large that one recognizes the participants as having a bias, this is the moment of truth or climax!
6. Then a mirror image self-reinforcing sequence starts in the opposite direction.
In conclusion: The logic of non-rational behavior is the point I'm trying to make. Like I said before, you can't predict what one person will do, but get a crowed of people interested in the same thing (market), then you can start to have an understanding of the coarse where the future is headed.
Hint: Form a hypothesis; take small position to test out your theories, wait for the market to prove you right or wrong.
-Listen to world financial leaders. Follow trends in other world markets, what happens in one market could forecast what will happen in other markets.
-What makes people act and react? Answer: PSYCHOLOGY-The herd instinct.
Individual in the crowd: individuals have a feeling they must belong to a certain group, there must be some mechanism to conform to behavioral standards imposed by other groups. Integrative Tendency: The tendency to devote oneself to the crowd: one must have there behavior altered in a crucial way by the will of the majority.
1. Identification of a crowd
2. Acceptance of a crowd’s belief system
3. Submission to the authority of a leader (crowd)
CONCLUSION: The feeling that people must belong, people act differently as crowd participants. Crowds tend to behave in a non-rational, emotional way in pursuit of its objectives and force its members to do the same.
*Crowd Behavior: The basic formation of a crowd is a condition of "non-equilibrium"; this condition creates stress, conflict, or commutation, and provides the purpose for a creation of a crowd. The purpose is to alter the disequilibrium in order to benefit the crowd’s membership. The targeted change may merrily be the attraction of additional resources away from the environment (as in the case of profit- Making Corporations) or imposes creative evolution on the environment (as in the case of social revolution). A crowd will continue to respond to the implicit non-equilibrium either until the crowd's purpose is achieved or until the environment damps down the crowd. When a crowd’s purpose is fulfilled, equilibrium exists and the crowd will disintegrate (sell –off).
CONCLUSION: A crowd is part of the hierarchical structure of nature, and each crowd can be defined in terms of its processes rather then its physical characteristics. (Non-equilibrium conditions)
***Cycles in the Crowd: Every crowd has both a beginning and ending-life cycles
1. GROWTH
2. MATURITY
3. DECLINE
Once a crowd with common values and a common objective has been established it will then respond positively to the input of new items and information from the environment.
1. During the growth stage of its life cycle a crowd is completely able to maintain its integrity, even in the face of a hostile environment. 2. At maturity the crowd becomes self-oriented and inflexible.
Eventually this rigidity will mean the crowd is unable to adjust any further to changes in the environment.
3. The crowd becomes hostile, begins to decline. (Hence generation and degeneration are succeeded by regeneration in a continuous process.)
*In understanding how people act as a crowd builds a platform for predicting financial markets and prices, if you can forecast crowd behavior you should be able to forecast prices of stocks.
All of these theories can be aimed at a stock market crowd for this is by far the largest crowd in the world gathered for a common goal - PROFITS. Finding the next big pay off!
This brings me to another subject in my studies.
THE STOCK MARKET CROWD
The two groups of investors "bullish" crowd or "bearish" crowd (these crowds consist of the same person, this person is bullish or bearish, depending on there views, which later on confirmed and then fueled by Herd like mentality). The bullish crowd anticipates a rise in prices; a bearish crowd anticipates a fall in prices. Members of either crowd have a belief of what the market future will bring. They are linked together via some sort of communication: newspaper, TV, financial reports, this connects like-minded individuals.
The presence of two crowds in a financial market, with opposite views, ensures that a state of conflict exists. The presence of stress is the main reason for change in a formed crowd-mind. "If everybody thought the same thing at the same time, there would be no market", and no price movements. The influence of different views as to the future course of prices, and the fact that conflict between the bulls and bears takes time to resolve, ensures that prices move up and down through time.
*Influence of emotion is created when a commitment is made; buying stock which is joining the crowd that you agree with - Herd like mentality. The trade is made and a feeling to get it right. This trading position is outside the control of the participant. There will be feeling of pleasure if the price goes up and displeasure if the price goes down.
The Herd Instinct: These feelings of pleasure and displeasure are intensified when an individual associates with other people. If the trading position is right one will consort with others. Within this crowd of the right trading position the crowd will congratulate one each other, the news will provide supported evidence, and attention will be focused on the immediate future where critical analysis is less necessary, rather then on the longer term. Members of the right crowd will tend to emphasis the weakness of arguments of the wrong crowd. Members of the wrong crowd will feel a need to associate together for protection; they will try to confirm each others views as being correct and point out errors of the right crowd. No matter how rational was the original decision to enter into the trading position, the vary act of dealing, moves an individual into a less rational, crowd-type environment, especially if the investor accepts the views of the crowd.
This goes back to a BOOM/BUST SEQUENCE.
“The Bull/Bear life cycle of emotional commitment to a crowd seems to vary on the situation. At the beginning of a bull trend the fear of making losses still predominates, while at the start of a bear trend greed tends to stop people from selling.
At the early stages of a price trend the emotional commitment of the successful crowd is weak. There comes a stage during a price move when the commitment becomes more intense. This is when the realization of a price trend is going up or coming down. Emotional conviction replaces any rational doubts and investors start to chase the trend and open new positions.
Once a bullish or bearish price trend is recognized a foundation is laid for a price reversal.
The trend will remain for a time period but fact remains, once people are committed to believing in a particular trend, and invest in that trend, and fewer people are left to preserve the original trend. (Majority rules).”
*Keep a close watch on what other people are saying and doing. Do the reverse: meaning; if a crowd is buying aggressively the top is near so sell. If a crowd is not buying aggressively watch the market and jump in at ground level. This is a rational approach to a non-rational market.
-crowds have objectives of there own
-crowds respond quickly to leadership
-bullish and bearish crowds like to move prices in there favor
-leadership role is partly provided be movements in price
The conflict between the bulls and the bears are resolved when one group disintegrates and moves resources to the other side. When a persistent price moves in a given direction, the successful crowd will be the one with the price favor.
Trading positions are opened on the basis that the successful crowd’s belief system will continue to be correct. Personal interest becomes influenced by the group’s interest, and over trading begins.
IMPORTANT
As more people move over to the successful crowd’s point of view, prices will continue to move up. This excites the crowd further, peoples interests will keep the prices moving up. *brokers, market makers, and investors will keep favorable comment to the media, and this promotes to a wider audience.
Members of the unsuccessful crowd will tend to desert to the successful crowd.
Prices will continue to climb, this is a signal to the unsuccessful crowd that there arguments are ineffectual.
The stress created by the combined forces of price movement and shrinking numbers (volume) and unfavorable propaganda becomes too much, and the trickle of deserters from the unsuccessful side to the successful side becomes a flood - (VOLUME).
*Prices will rise or fall sharply as the change occurs, an emotional period accompanied by high volume. *Those investors who joined the successful crowd are more committed and least likely to change there minds quickly and will provide sufficient finance to keep the trend going.
(This is why you must follow the trends carefully (PRICE AND VOLUME), because all this can flip in a heart beat).
I will add to this if people are interested, I will explain why charts are not necessarily good, I will explain why multiples are better to look at then stock price, I will reveal why you must look at P/E and how to use them, and why sectors are so important to track...there are many things to take into consideration, I will tell you everything you need to know so you never loose money again, I haven't lost money in 8 years, it was a rough 9 years leading up to that..lol, but I am full of wealth and knowledge. Any one wants to learn more just let me now. I will not insult or mis lead you.
REF: George Soros, Tony Plummer