Make more money by doing the opposite of most Stock Investors

Howard Marks, renowned value investor and one of the wealthiest Americans (according to Forbes) has said:

“Further, security prices are greatly affected by investor behavior; thus we can be aided in investing safely by understanding where we stand in terms of the market cycle. What’s going on in terms of investor psychology, and how does it tell us to act in the short run? We want to buy when prices seem attractive. But if investors are giddy and optimism is rampant, we have to consider whether a better buying opportunity mightn’t come along later.” –Howard Marks

Howard Marks reminds us of what Warren Buffett more-concisely said:
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”

But let’s break this wisdom down even more to try and understand investor psychology and how this can help us to make more money in the stock market.

I’m sure that we can agree that the stock market prices are greatly affected by investor behavior. After all, we all have tendencies to become greedy and to want to wait until our stock prices go higher before selling. On the flip side, the majority of people become fearful when we see our stock prices falling and we think about selling to prevent further losses.

Now if we multiply this among all of the millions of investors on a given day, you can see how our collective emotions of greed and fear greatly affect stock prices. And this has little to do with the long-term value of the underlying company.

Therefore, we shouldn’t really worry much about these short-term swings in price, but we can use them to our advantage. For example, if price drops significantly because other investors are fearful, we should be actually thinking about buying more stock.

On the other hand, when the price shoots up above our estimated value of the company, then we should be thinking about selling and capitalizing on this mispricing opportunity.

Howard Marks also talks about market cycles. The stock market and the economy have cycles. These cycles tend to repeat. The cycles of the economy and the stock market are often correlated. For the economy, there is a short-term debt cycle and a long-term debt cycle. The short-term debt cycle goes up and then falls about every 5-8 years. The long-term debt cycle goes up and then falls about every 70-85 years.

The stock market also tends to follow these cycles. So if we can look at long-term debt cycle events such as the crash of 1929 and the economic crisis of 2008 (about 79 years between), we can see some repeating patterns. This can help us to think about the next short-term debt cycle too. If 2008 was the last large decline, and the interest rates have been near zero since then and the FED has just started to raise interest rates, then this can signify that the next short-term downturn is approaching. After all, it has been about 9 years from 2008 until 2017, so a short-term downturn should be approaching and is needed in the economy to rebalance debts.

Therefore, if we can look for clues and have a rough idea of when these downturns will happen, then we can be prepared by keeping more funds in cash. Then wait when the market falls and when other investors get fearful, we can start buying up bargain stocks at half-price or better.

In the opposite way, if the market prices begin soaring and start hitting record-breaking marks and the masses are greedy, then that is the time to start selling and storing that money away to wait for the next downturn.

By following the advice of Marks and Buffett, and by looking for these clues of investor psychology and market cycles, we can greatly increase our changes of building more wealth with less risk.

I hope this article has been helpful for you. If you have any questions, feel free to email me at Grant@BeatTheMarketAnalyzer.com

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