Why Most Investors Will Lose Most of Their Money During This Bear Market

Jane texts Emily: r u gna wr a drs or pants tonite?
John texts Bill: dude, u wring jens or kkis to th prty? 

Jane likes to stand out, but she doesn’t want to stick out. John doesn’t give a damn what he wears, so long as  he’s not the only one wearing it. These seemingly innocuous efforts by Jane and John to blend in with the crowd reflect mankind’s subconscious impulse for connection. Separation from our cohort is, perhaps the deepest, most primordial fear humans have. With good reason. Here’s an example in nature that demonstrates the value of sticking together (Be sure to get rid of the pop-up by clicking on the small x in the upper right hand corner of the pop-up):

We know intuitively that society (the herd) is our chief ally in life. Many, if not most of our actions are governed by what socionomists call the unconscious herding instinct. We especially herd together in uncertainty. This might be good in most situations, but in the stock market it is disastrous.

Fear of being out of sync with the crowd subconsciously drives investment decisions. In the early stages of a bull market, the calamity of the previous bear has everyone afraid to get in. About mid way up, social mood turns positive in what Prechter labeled the point of recognition. From that point on, fear of being left out brings the majority in.

The same fear-the fear of being out and missing out-is the operative emotion long past the top. As the bear market gets underway, investors get a queasy feeling about their paper losses, but doggedly hang on because everyone else is, and they would hate being out in the cold alone. Their decision to hold is helped by periodic short covering rallies. But the rallies do not make new highs and the situation worsens until, about half way down, another point of recognition brings the crowd to the give-up stage, and massive liquidation takes the market the rest of the way down in a rush. The net result of a bull-bear cycle is that the majority get in late and hang in too long. Here’s an illustration of how it might go over the next couple of years:

Recognition Point

I’m reminded of a snippet of dialogue in Hemingway’s, The Sun Also Rises:

“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”

By my shooting-from-the-hip reckoning, the gradually part will last into 2015, at which point the crash will accelerate.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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