How to Win the Stock Market Game: Revision

Mass Psychology & Contrarian investing strategies to becoming rich in the Markets 1

Mass psychology is akin to going to the buffet; most people go to a buffet and choose the first morsels of food their eyes land on. The wise move is to wait and slowly scour the buffet for the owners usually put the tastiest morsels in the corner. Patience, knowledge and understanding of how the mass mindset operates can yield great results both in and out of the markets. It’s not what you know that helps you but what you think you know that hurts you.

The concept of a buffet is straightforward; all the worst food is served at these all you can eat buffets; offer lots of quantity but very little quality. The model works spectacularly as the masses think they are getting a bargain while in reality, they are causing havoc to their digestive systems.

If one examines the buffet with patience, you will find that the salad bar is one of the few places where you can find something really tasty and healthy at the same time. Pay a little more attention, and you will find a cook grilling sirloin steaks and a small but decent selection of cooked vegetables. Over 90% of the individuals opt for the junk food, which usually consists of one of the following; hamburgers, fried chicken, French fries, pizza, fried chicken wings, fried chicken nuggets etc.

How this relates to investing in the markets

Most Individual will try to load their plates with as much food as they can (mostly with junk in the hopes of getting a bang for their buck. What’s the mistake here? They are sacrificing quality for quantity. If you want to win in the markets, you need to focus on quality, not quantity.

In the same way, individuals enter the market with the hope that if they spread their money all over the place, they will hit a home run eventually. Who do they go to for advice? Financial experts who whose knowledge of the markets is questionable at best; for example CNBC, CNN, and other investment related sites.

These individuals invest their hard earned money without taking the time to familiarise themselves with the landscape. They are walking into a field that is loaded with mines, and they expect to strike it big utilising this time-tested concept that history proves has never worked. Failure is all but guaranteed.

Some individuals think that by hiring a money manager, they will escape the pitfalls of investing. In general, if these money managers were so good, they would be managing their money instead of trying to fool others into thinking they know what they are doing. Why not make a fortune for yourself instead charging others a fortune to lose their money. Riches come to those that seek it and poverty to those that chase it. Remember this; one should buy when there is blood in the streets and sell when the masses are euphoric.

Let’s apply the buffet principle to investing


Selection

Scour the marketplace for good plays, avoid those stocks that appear to look good and that are being hyped by the media. For example, focus on companies that are strong but are being treated badly by the markets. Every stock pulls back and if the company has a viable product, the best time to buy shares is when the masses are ignoring it.

Patience

Don’t just buy a company because the experts are stating its going to keep trending higher; when everyone is buying caution is warranted. Wait for the stock to pullback or look for other strong companies that have fallen out of favour. Do your research or find a reputable company to help you (this is getting harder and harder to find these days). Even if you find a reputable company, it always pays to check the stocks that are being recommended to make sure they meet your investment criteria. Patience is a virtue that the astute investor uses to build a fortune.

Discipline

Once you find a winning strategy, stick with it; if you keep changing your strategy, the outcome will be far from pleasant.

Conclusion

The first thing you can do to help you overcome the built-in secret desire to lose syndrome would be to determine the trend. At the tactical investor, we do this via the Trend Indicator, a powerful tool that combines mass psychology with the finest aspects of technical analysis to predict trend changes in advance of the event.

One has to remember that the mass mindset is set on self-destruct mode, especially when it comes to investing. For some strange reasons, the masses seem to thrive on misery and pain, or they know no better; the outcome, either way, is the same. How else can one account for the fact that 90% of market participants lose money over the long run?

Mass psychology for it shows you to be real contrarian and not just a fashion contrarian. Most contrarians fall under the category of “fashion contrarians”; they seem to think it’s cool to call themselves contrarians without knowing what it entails to be a contrarian.

This is a small foray into the field of mass psychology and contrarian investing, but to start you have to drive the following principles home

1. Never buy when the crowd is euphoric
2. Load up when the crowd is panicking and fleeing for the hills; this is the best time to find excellent long-term plays.
3. Spend time identifying stocks you like; when opportunity knocks you will be ready to buy
4. Paper trade first for in theory anything sounds easy and after you feel that you have mastered things; start with small amounts of money. Theory and reality are not the same things and its best to start small as you will need to be ready to deal with unforeseen obstacles. For example, the market might drop lower than you expected and the stock price might drop before it bottoms out.

Courtesy of Tactical Investor