``Whatever method you use to pick stocks or stock mutual funds, your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed. It isn't the head, but the stomach that determines the fate of the stock-picker." - Peter Lynch
In stock markets, the implication that the public buys stocks because of entirely valuation purpose is a fallacy.
People buy or sell stocks for myriad of reasons, aside from valuations, namely, monetary policy induced responses (yield chasing), momentum, charting, punting or even to the most trivial reasons such as social pressures, gossip based or ‘my neighbor/TV/guru says so’ and etc.
Valuations, as presented by typical sell side institutions, frequently represents as fodder for cognitive biases for participants in search of a fillip or stimulant to take or justify actions (confirmation, available or information bias) or ownership (post purchase rationalization).
It’s almost commonplace to see people act (buy) supposedly based on “fundamentals” and act (sell) oppositely based on intuition. Time would, in essence, be the defining or distinguishing factor, as short term trades HARDLY REFLECT on the changes in the so called “micro” or “macro” fundamentals which are mostly long term driven.
Hence, rationalizations over the direction of actions don’t match and serve as concrete evidence of cognitive dissonance or disorientation on the part of the short term punter.
In an off track horse betting station, these would be the routine responses when a punter loses a bet… “I had that horse on my list, but”, “I was about to bet on that horse, but”, the “teller changed the number”, the “jockey took a dive!”, the “race was rigged!” and etc…
For the winner, I am GOOD!!!
This practically is a feel good thing or about self importance, more than risk-reward tradeoffs over the odds of the racing event as horse punters essentially disregard the cumulative effects (ratio of losses over wins) and look at day to day outcomes.
In behavioral finance lingo this is called fundamental attribution error or the attribution of success to oneself and failures to external or other sources.
The same errors can be observed with most market participants with short term expectations and perspectives.
And that’s why short term perspectives seem almost always in search of the ever elusive Holy Grail, because goals, required information, emotions of the moment and actions don’t square.
And Dr Janice Dorn, in her magnificent article Trading Lessons: There Is No Magic Bullet published at the minyanville.com, eloquently articulates on the psychological framework behind these (bold highlights mine),
``Most traders are looking for the Holy Grail, the keys to the kingdom, the one great book. They want the magic indicator, the chart pattern, thing, or person that will tell them what's going to happen, and what to do.
``It's a natural human tendency to want to know what's going to happen next. Chart patterns, indicators, fundamental analyses, or technical analyses are constructs we build in an attempt to bring order to uncertainty. We do this in part because we're afraid that, without a detailed roadmap, we may have no future.
``In the process of building these models, we become them. We want to believe what our eyes are seeing, when what we're really seeing are our own limitations. Charts are emotions plotted on a grid: When emotions change, the charts do, too. We can't control that, just as we can't control what others believe, or how they act on their beliefs.
``We can control only one thing: how we respond to the situation that's right in front of us. In order to do this with consistent success, we must adopt an attitude of flexibility, and rid ourselves of all our rigid assumptions.
``In the final analysis, those things we've seen on paper or had in our heads before we enter the markets are illusions. They may be useful illusions, but they're illusions nonetheless. We have no idea whether they're true or not until the markets tell us. If there's any absolute truth in trading, it's that, with 2 possible exceptions, the markets are always right. Traders ignore this at their own peril. If there's a technique for winning, it's to stop believing in so many things that are wrong. In order to do this, we must learn to harness the villains of pride and greed that speak falsely to us, telling us that we've already won. We haven't won if the markets say we've lost. By eliminating what's false, we open ourselves to the truth.”
In short, biases are illusions and pride and greed are obstruction to goals, which ultimately reveals that the basic problem, in the financial markets, is in dealing with the self. Ergo, any serious traders or investors would need to subdue or minimize these frailties and develop a strong sense of self discipline instead of looking for external attributions or excuses.
This goes similar to the prescriptions of Peter Lynch of the traits of a successful investor, ``The list of qualities [an investor ought to have] include patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit mistakes, and the ability to ignore general panic.”
Since the world is highly complex, where we can’t discount the contribution of luck in any endeavor we opt to undertake, I’d like to add, the ability to harness and manage luck!
