The Madness of Crowds

The Madness of Crowds

When you are as old as I am and you’ve been through as many booms and panics as I have, you’ll know that to lose your position is something nobody can afford; not even John D. Rockefeller.

Elmer Harwood

Okay, you've done your trend analysis on the essential metrics of a company. You've read and studied their business model and their competitive position within the industry in which they operate. You have studied the results of the way management allocates its excess capital.  You have patiently waited to buy the stock of this company when the marketplace put it up on sale. You have repeated this process over time and have bought several other stocks to build up an attractive, diversified investment portfolio filled with productive assets bought at reasonable prices. You've done everything right and feel good because although not all of your holdings have worked out, on the whole your investment portfolio has performed well and you are making good money. 

Then, it happens, the stock market breaks and heads sharply lower. You know this happens every once in awhile and your confident that although your portfolio is taking a hit you have you the good sense and experience to hold onto your positions. The market rallies but begins to flag once more. It sells off again but its sharper this time and people begin to break and head for the exits. You don't like it but you've seen this before and hang onto your holdings. Then the market caves in bringing out the forced sellers who have to liquidate their assets to meet margin calls. Everyone heads out the door at the same time and panic reins in the streets of the stock market. You see the money you've invested in your stocks disappear fast. Another flagging rally and the market heads lower again. You're down maybe 20 or 25 percent from the top. What do you do? You tell me you hang on of course. But this is just a theoretical exercise. You are comfortably sitting at home reading this. What if it really happens and there is blood in the streets.

There are powerful psychological and biological forces that govern human behavior. This is accentuated in large crowds of people where their innate animal impulses are multiplied and feed off of one another. Remember if we create our own reality, http://nivag18.blogspot.ca/2017/03/

then a crowd will do the same if only because it will have the energy of everybody in that crowd fueling it. The careful, deliberate, civilized individual gives way to the animal cravings of the beast that lives in the heart of every crowd.

When the stock market plunges, the need for relief from anxiety creates such a strong pull that everyone will be driven to liquidate their holdings at the same time, so they can survive, like the drowning man who will reach out to grab anything to save himself.

It's important to bear these things in mind before they happen and to set up some sort of safety mechanism to save yourself from yourself when there is blood in the streets. One way to do it is as follows...http://nivag18.blogspot.ca/2017/04/normal-0-false-false-false_98.html