Not that this is news to anyone who trades, but:
"A small group of scientists, including some psychologists, say they are starting to discover what many Wall Street professionals have long suspected — that people are hard-wired for money. The human brain, these researchers say, responds to high-stakes trading just as it does to the lure of sex. And the riskier the trades get, the more the brain craves them.
French prosecutors have likened Mr. Kerviel’s trades to a drug habit. That is no surprise to Brian Knutson, a professor of psychology and neuroscience at Stanford University and a pioneer in neurofinance, an emerging field that combines psychology, neuroscience and economics, to examine how the brain makes decisions."
As someone who started on a trading desk, I can tell you from personal experience it is absolutely true. And my transition from trading to research reminded me the period of time when I gave up speedballing heroin and cocaine years ago — the longing, that sense of emptiness, that yearning for the sweet, sweet high . . . hmmmmm.
Where was I?
Oh, yes, trading addictions.
In all seriousness, there is a definite adrenal rush to trading, and the highs and lows not all that different from what gamblers experience. The difference is casino gambling is nearly entirely random, whereas markets have some degree of non-random behavior, thanks to mean reversion and human behavior. Then there are the advantages of compounding.
The full article is worth a read . . .
Craving the High That Risky Trading Can Bring
NYT, February 7, 2008
I would have added the word ‘very’ to the title.
Of course I was kidding — I never stopped shooting up . . .
Two words: Operant conditioning
can’t wait for the people to migrate back here with the “BR used to shoot speedballs?”
Hey, if they don’t get my sense of humor, I say fuck ’em. They are liable to make crap up anyway.
The latest version of that is that some needledicks are saying I am in the tinfoil hat conspiracy grouping — despite disagreeing with the claims of the plunge protection team (PPT) critics, and despite saying that BLS data isn’t corrupt (merely bad)
If they have to lie to attack your arguments, it means you are hurting them . . .
Similar progression of “neuroeconomics” thoughts are in Jason Zweig’s book “Your Money and Your Brain”.
See 23 Aug 2007 of cnn.money.com article
Yep, million of years of being hard wired the way we are sure works agains us in the market. At least for me…..
As always, your mileage may vary.
wow, BR stopped shooting speedballs. No wonder there is a bearish sentiment around here… Get back on drugs and things would look rosy again. Come to think of it, that would explain a lot about some of the posts that the permabulls have been making recently…
Actually BR gives the appearance of being a lot more familiar with a Mama Leone’s meatball than a Frisco speedball. Bon appetit.
BR: Once you kick speed, the weight just piles on.
When I am under 200 lbs, thats how you will know I’m back on the junk . . .
i am new to trading, and i am not able to fathom who in their right mind will still be invested in this market…holding long positions in growth stocks?
i did read that pension funds, mutual funds etc make up almost 80% of the money in the market, which implies that its OPM which is at risk.
i do have some first had experience since recently i took my wife’s retirement money from Tiaa-cref some mutual fund, and they claimed that its not a good idea to take money out of market. yeah right, just wait for it to completely melt like it happened during 2000-2003.
are these people not accountable? i am sure that the other retirement money, which is Retirement system of alabama is still fully invested in coporate bonds and stocks….and we have no say in that, other than starting a lengthy litigation that their money management skills are not good.
i know that a ton of retail investors are speculators with no sense of macro-economy and they are emotionally attached to their stocks….and they are alway “cost averaging down”, but since they make a very small number(i think less than 5-10%).
i also know that many retired people are also managing their own money actively and they also behave like most retail investors.
if anyone knows this data, please share it. thanks
cathompson – Part of the problem with what you are talking about (funds, etc. still being primarily long in a clear bear market) comes directly from the way in which they are accountable. The mutual fund industry is based on the comparative performance standard (which I personally think is crap). Basically it means they are trying to beat some benchmark like the S&P 500. Doesn’t matter whether that means you make or lose money on the year, as long as you do better than the benchmark you’re considered a top performer.
or say that “they” attacked you…..
Lying is the sport of choice of Wall Street. IT’s just too bad that they manage to convince many people that they are not FOS…..
What just happened? Saw the Dow make a U-turn north. Was it something Chambers said on CNBC?
My initial reaction to the addiction thing is that the researchers have just created legal grounds for “rogue traders” to avoid prison time.
Beyond that, I would partly agree and partly not. Trading in certainly emotionally charged environments – trading desks, for example – certainly offer that potential given the stakes involved. For your average part-time trader, though, I don’t think it’s nearly as big an issue. There are a great many other psychological pitfalls for them. :-)
Even though you are an uninformed, insulting son of a bitch, I will give you some good advice. You will probably ignore it because you seem to do the wrong thing frequently.
Stop trading, unless you have a hobby account and you are using money you can afford to lose. Buy mutual funds when the market is low and then hold them until it appears your account need to be readjusted. Then move to cash or move to another fund that looks more promising. Let experts pick the individual stocks. You can’t win. Never put money into anything at a top. Foregone profits are easier to live with than hard losses.
With regard to pension asset management, which I have done, you need to understand what the word, fiduciary, means. Asset management is largely a practice in risk management, not market timing. The advice from T. Rowe Price was prudent, considering the audience they are typically addressing.
In the context of “long-term” investing, a pure “market timing” approach can do significant damage to your average returns over time. The timing of your “exit” is not difficult to select. Where it gets tricky is timing your re-entry. Based on history, between 80% and 90% of the returns attributable to market performance comes from just 2% to 7% of the time in the market. To pick the “bottom” and those market jumps of four to five percent or more in just a handful of days is near impossible.
With the exception of those rare traders and fund managers that can successfully time the market, “time in” the market is favorable to timing the market, without regard for current market conditions…
Techy, Trading is a foreign beast to me so I won’t go there, but the reason many of your long term investors fare so poorly is because of bad behavior, ie buying into a market timing culture that is pounded into our heads on a daily basis. Lipper did a study on equity mutual fund returns from 1984-2004 which showed that the average equity mutual fund returned 10.7% per year. The average fund investor in the same equity funds over the same time frame earned 3.7% per year. The difference (7% compounded per year!) in those numbers can be attributed to bad investor behavior, buying euphoria, and selling fear. Peter Lynch also spoke of this in one of his books, as it was a source of frustration that the average investor in his fund only captured a fraction of his great returns. Another reason for failure is lack of diversification, and asset allocation/rebalancing. I am actually quite bullish on this market for my long term portfolio, as lower prices can create better values. I realize that I can be wrong on the shorter term, but again my time horizon is very long term. Trading on the other hand is foreign to me, as my personality could not handle the day to day struggle of the markets. I think that the media today does a disservice because they fail to differentiate trading from long term investing, which to me is day & night.
Volatility, fear recession, euphoria..it’s always been there and always will be. This time is no different.
john forman – huh? Can’t recall posting anything about mutual funds, particularly since I have never owned a longside open ender. I’m strictly a deep discount closed end buyer and also find grzzx helpful since I dont trade on margin.
Like I tell my wife,
Better a bottle in front of me
Than a frontal lobotomy
Funny thing is I’ve only been reading the site for maybe … 6-8 months. I finished that paragraph and took a minute to reflect: Barry used to shoot speedballs?!?, or is he just f*&(ing with us? Kinda disappointed when I found out he didn’t, hehe.
Seriously though, I’m getting to the point of stuffing my savings in a mattress reading all of this stuff. At least the criminals that would break in and knock me over the head would honest about it (and could be arrested when caught.) WTH is going on in our system when there is almost zero accountability and incentive to do the right thing? Screw the recession, when do we start laying odds on the next revolution?
thanks for the replies….greatly appreciated.
cinefoz: i have deposited 80% of my savings in a government bank in india, earning 9%.
and i am 100% in cash right now in my hobby trading account, would love to go short, but not comfortable.
to all those who raise the question of market timing: why is it so hard to know that being in stock market is risky for next 12 months, and its better to lose the 10% gain than take 30-40% risk.
was it really so hard to know that economy was slowing and risk appetite will decrease….leading to drop in price multiples…
was it really hard to know that Homebuilders were not a good buy in July?
was it hard to know that Financials are not a good buy in Oct?
was it not crystal clear that Technology cannot sustain p/e>40 because of slowing economy in Dec?
i am not talking about perfect market timing (like cinefoz claims) i am talking about going out of market when you feel the risk is getting very high.
unless USA really pulls out of slump in the next 3-4 months, i see very bad days ahead…consumer spending is going to slump big time just due to all the recession talk and lay off talks.
same thing with business spending.
lets assume that i am wrong, and all the signs are misleading about a long recession…..and the market jumps back 10-15% before i can re-enter…..
but what is the other scenario, the market tanks 30-40% if the long recession theory is right?
so whats wrong in missing out 10% gain to avoid 30% risk?
The advice here is well worth following. Do not screw around with your retirement funds. If you pick a fund with a good manager you’ll be fine. It’s their job to invest properly and if they do their job well you don’t have to worry as much about bear markets. You just cannot time the markets. I back-tested a couple of my mutual funds against a couple different timing methods. The funds left in buy and hold easily beat the market. I have several funds that have grown at 12+ percent per year since ’93 versus the s&p less than 8%.
As for “neuroeconomics,” I get my fix from tournament style, no-limit holdem. Just as exciting and with less risk!
Sorry, I didn’t get whether you were acknowledging traders “speedballing heroin and cocaine” or saying it doesn’t happen. I can tell you it is still common (in NYC) – just maybe not as common as in the 80s.
WRT a post asking if the modern finance business is giving bad advice when they advise people to stay in the market: I say absolutely. Why tell even a young person to hold a stock fund right now when they face losing a significant percentage in the short term? I recently had a major mutual fund company’s phone rep. imply (he could not actually advise, of course) that I should not get out of an equity fund. I got out anyway and have saved myself literally thousands.
This topic links in with your post under your alter ego musings and the
authors@google youtube link to Michael Shermer, Professional Skeptic, on the Mind of the Market.
Good watch. Good read. Thanks. It’s nice to know how the market works ;>
Techy, You stated: “so whats wrong in missing out 10% gain to avoid 30% risk?”
I would point to the study from Lipper to answer that question. I don’t know your personal situation so I am talking in general terms.
Why approach investing in an all or nothing mode? 100% cash or 100% in the market is not asset allocation or diversification. If you are that nervous, you might want to consider scaling into suitable longterm investments through a dollar cost averaging program. Are you kidding about the India bank?
when people used to tell me stock market historically always beats other assets class.
but what if thats about to change? or hasnt that already changed if someone started investing in year 2000? if we do some backtesting for last 8 years??
what about nikkei, 15 years??
my perception is that stock market does well only because of speculative mania…where people start bidding up with the hope that they will be paid more in future by some one else…..and within no time price multiples go all the way to 100 or more.
but what if that is about to change…..what if equities will be viewed as a very risky asset due to all the turmoil in the past 8 years??
what if people will not lend a money to a public company unless they get a better yield than a money market account?? and shareholders are respected for their opinion (unlike what MSFT is doing right now)
right now a shareholder makes money only if there is speculation….and he loses money if the market starts to tank, the companies are not using the profits to take care of the shareholders, they use it to take care of the management agendas….
shareholders did not care in the past because they used to get better price from the next person..
this may sound like a idealist talk…..but if usa goes into a long recession (1-2 years, almost depression…..unemployment as high as 8%, housing falls another 40%)
it will become true and all the historical data will get averaged down..
You’ve given me hope! I’m am officially going cold turkey on the coke/heroin speedballs as of today.
You’ve given me hope! I’m am officially going cold turkey on the coke/heroin speedballs as of today.
no i am not kidding, i should have locked rates for more long term…but they are cutting down interest rate….and right now interest on deposit is around 7.5% i think.
of course this is not available for foreigners, and USD accounts (who wants to hold money in USD anyways :) , i think since i moved my money 18 months back, i have gained 15% just in terms of currency appreciation, if not for indian gov intervention Rupee would have appreciated another 15%)
inflation is very high in india…around 4-5%, but it does not hurt if currency is stronger than USD.(i dont know for how long, but relatively india is doing better right now)
BR – speedball, caught my attention :-|
imo marijuana was an excellent entry level hallucinogenic drug for me – it wasn’t expensive (force’g bad behavior) and I realized its hook line and sinker and was able to remove myself from its grip rather easily
unlike street drugs today – heroin, cocaine, crack and everything else – they are all tough entry level drugs to kick
funny how this whole big world works
what is a world with no cigarettes going to bring into being? I suppose downhill skiing and hangglide’g
I agree with what a lot of what you say and like you think the U.S. economy is in for a very rough time during the next ten years.
However it is true that the “stock market historically always beats other assets class.” It’s also true that “the market can stay irrational longer than you can stay solvent.” But that’s a question of time and there’s a big difference between a 30 yr time frame and a 5-10 year or 12-18 months.
It’s yet another reason to diversify and review your portfolio every year or so (in contrast to a trading portfolio).
I don’t care if the historical data gets averaged down. Frankly I expect it to. I wanna be able to preserve capital and beat inflation with as little risk as possible. Which means I won’t be putting all my money in a bank in India.
Wow, is anyone else listening to Mitt Romneys speech? Its great.
Trading isn’t addictive…
I can quit anytime I want.
I’ve done it many times.
Yea it’s great ……..
For spreading fear and stoking liberalistic fears…..
But the GOP excels at that anyway….
All of you who are advising Techy to implement a buy and hold strategy need to pick yourselves up a copy of Unexpected Returns. Maybe you already own the book. If not, buy it from Amazon. Then, when it comes in the mail, turn to Chapter 3. There you will find a cogent explanation of why your advice sucks.
Trading, if done correctly, should be very boring.
dgoverde, Ed Easterling is a proponent of asset allocation, rebalancing and dividend paying stocks. He has also wrote that he wants to see the P/E of equities come down to the 12x range. He is calling for a secular 20 year bear market. He has also used examples of the 1964-1982 Dow sideways move as a comparison to today. What he neglects to say however, is that many investors/managers with a nose for valuation performed quite well over the time frame that the “market” went nowhere. Again, asset allocation, diversification and a bias toward valuation provide superior longterm real life returns. Bottom line, I agree with Easterling, valuation matters.
For clarification, especially for dgoverde:
I’ve read Unexpected Returns, Random Walk Down Main Street, Behavioral Finance, but also Common Sense on Mutual Funds by Bogle and everything else in between.
Greater understanding of “the big picture” is possible when reading and respecting the views of others. To say someone’s advice “sucks” suggests a narrow view.
As the great Jesse Livermore said, “There is only one side to the stock market; and it is not the bull side or the bear side, but the right side.”
The “right side” is up to the individual. I believe Techy, Cinefoz, MS, and all the other “regulars” here at TBP offer valid points; however, what is “right” for them may not be “right” for others.
For futher clarification, my previous comments was not “advice.” It was an observation of history and also to make the point that managing assets (i.e. pension funds) does not meet a fiduciary level of care when “market tiiming” is involved…
Cheers to all…
can you give me examples of some stocks which have less downside?
The Big Picture/BR Sarcasm and Irony Index hits new highs in 2008
“Trading, if done correctly, should be very boring.”
Fuckin’ A right!
Techy and kk and Cinefoz,
I think you each are right. But Techy is right talking forward and KK and Cinefoz are right doing back testing. I think the next few years are a good time to not be all-in-long-buy-and-hold. Have P/E ever been as out of whack as they are now? Have dividends ever been as low? Then are you back testing apples to apples? You are not. Of course, I also realize that this argument is dangerously close to “it is different this time” espoused by a bear. But I can at least say “look at the market from 1965 to 1975”. Were those a good 10 years? Was there not a better place to put your money? People like Techy an I have to be careful to not miss the transition when we re-enter a long term buy and hold paradigm again. But I think kk and cinefoz don’t realize that so many of the underlying variables have changed that old ideas of investing are not as secure. When you have so much dumb money (401k funds are as dumb as they get) and so little real return, how can you compare to a time where that just wasn’t true?
Philip, In my view, dividends are actually quite robust compared to the past 20 years. Look at the Dow components and you will see quite a few 3.00% + yielders with good coverage. When I look for a yield stock, I want to see a history of annual increases, which gives me some purchasing power protection. I guess yield is in the eye of the beholder, as I am satisfied with 3%, and for a faster grower I’ll take 2%. PE’s are currently attractive for many equities, as the uncertainty of the market has punished many stocks. We can debate the E going forward, but I think the market has reduced the P enough for me to be interested. I would rather be a buyer on market uncertainty which translates to lower prices, than wait for the certainty which means much higher prices. Buffett said it best: “you pay a high price for a rosy consensus”. In my opinion, what has worked in the past will work in the future, buying equities at attractive valuations when the crowd doesn’t want them. This situation we are currently going through reminds me alot of 1990. For a long term investor, it is a very exciting time, although I certainly respect the current negative forces at work.
1965-75 was a bad time for many market participants that didn’t look at value. The go-go funds and the nifty 50 stocks were the root of the problem. People did not pay attention to valuation, they bought because it worked…until it didn’t. Sound familiar? S&P indexing, Dot-Com, Real Estate, history always repeats itself.
From 1965-75 there were funds that were 100% long that were able to compound at 5-8%, ICA, Templeton & Davis to name a few, although 1973-74 was brutal for all, much like 2002.
I was just realizing the other day that as my position management improves the adrenaline rushes are going away. I’m not sure if it is because I am becoming more accustomed to them or that the squeezing out of the risk factors in my trades has just kept them at bay.
I certainly like it much better this way. The gains are more consistent, I’m thinking more clearly, the fear seldom shows up and all the rushes are gone.
Maybe it’s called trading maturity
I told mysef this line many times when offered stuff:
You can’t REALLY miss something you’ve never try’d
once you cross that line it’ll be hard to say no – especially if I like it