The creative genius Charlie Chaplin said that an understanding of psychology is the basis for almost all success.
Chaplin was a gifted actor of course, but also a musician (he wrote and performed the musical score for most of his films) a producer/director and a very shrewd businessman. He understood the business value of the emerging film industry, and was one of the first independent filmmakers to own the rights to his intellectual property.
Charlie famously sold his large stock holdings in 1928, shortly before the crash. He understood the herd mentality of the bubble, and that if something seems too good to be true it probably is. So if you want to have success investing in the stock market, don’t forget psychology.
Specifically abnormal psychology. The diagnosis is in; this stock market is certifiably bipolar and schizophrenic.
Schizophrenic in hearing voices in its head. Whispering into its left ear is “I’ll give you free money forever” and in the right “I’ll cut you off, the people will realize that their paper money is worthless, they’ll riot in the streets and storm your mansion and chop your head off.”
Fortunately, for people with long stock positions anyway, the market is usually happy, like a maniac, listening to the whispers coming in from the left.
When the other voice gets attention however, it gets sad and depressed and sells-off quickly.
You treat a human with these mental illnesses with a cocktail of heavy psychotropic drugs. Right now the drug keeping the market happy, and the source of the voice from the left, is the Quantitative Easing by the Federal Reserve.
You get a positive report but is it too positive? Paranoia sinks in. Good news might mean a decrease in the amount of drugs you get. For a drug addict, bad news can be good, if what they are angling for is to stay on their meds.
It’s a little scary thinking about how much power and control the Federal Reserve has over our economy and the stock market right now. “When will the Fed start ‘tapering’ their Quantitative Easing?” That’s almost all anybody really wants to talk about.
I’m afraid Janet Yellen might let loose a big wet fart staining her undies and then immediately step into range of a camera. The grimace on her face captured in the photo might be misinterpreted as the start of a hawkish turn, causing a drop in the dollar in the Forex market, followed by a selloff in the stock market.
That’s about how precarious our situation is. A fart from Janet Yellen could result in a worldwide recession.
That’s a good environment for hedging. Don’t forget your short positions. If you ignore the short side, you leave a significant percentage of your potential profit on the table. The difference between betting on a long vs. short stock position is the difference between betting on a black flush, spades or clubs, vs. a red flush, hearts or diamonds.
The short sell, the put option, etc., they are there for a reason. The chances of an eventual sell-off are about as good as the chances that a bi-polar maniac will crash eventually, after a three day bender of mixing prescription drugs with alcohol and other self medication.
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