• Home
  • About
  • Team
  • Contacts
  • Blog

Successful traders psychology

  1. Home
  2. Blog
  3. Successful traders p ...

Portfolio manager’s Letter July – August 2012

Successful traders psychology

Successful traders psychology

The market may be efficient, but it is certainly not rational, and it is efficient only in the sense that it is very efficient at measuring Wall Street’s current mania. Whatever the market is measuring, it is undoubtedly not the intrinsic value of the stocks being traded. Then, this P.E. began to increase until, by 2000, it was 34 gradually. From its peak in and has a lot to do with successful traders psychology. In 1982, the P.E. of the S&P 500 was 9. 2000. It has decreased until today it is around 13.

During this entire period, Corporate Profits, ignoring the occasional recession, have increased at a reasonably constant rate of about 8% per year. An efficient market should reflect this steady growth in earnings, but the actual market does nothing of the kind, but a good deal of successful traders psychology. What we get instead is a steadily changing view of the value of corporate earnings.

Testosterone and risk

John Coates provides additional evidence of an irrational link between human behavior and the markets in his new book “The Hour between Dog and Wolf.” A successful trader first at Goldman Sachs then at Merrill Lynch and Deutsch Bank in the eighties and early nineties Coates returned to Cambridge to research neuroscience. His time on the trading floor got him interested in the effects of steroids on successful traders psychology. He now suspects there may be a chemical solution for the riddle of Mr. Market’s psychosis, and a biological basis for his behavioral problems. The laws of financial boom and bust, he maintains, have more than a little to do with male hormones and successful traders psychology.

In a series of experiments that he conducted on the trading floor of a large London firm, Dr. John Coates tested the testosterone level of traders in the morning as they showed up for work and found that traders with high testosterone made more profit during the day than those with low levels. Dr. John Coates identified a feedback loop between testosterone and success that dramatically lowers the fear of risk in men, especially younger men. This loop builds on success because successful trades feed successful traders psychology, generate higher testosterone, and acceptance of more significant trading risk.

The book moves on to a detailed look at nature human hormones and the effects of our chemistry on our behavior. Success fuels testosterone levels so that in a bull market successful traders psychology is fed encourages them to take on more and more risk, a process I suspect is intensified by the enormous bonuses paid to traders in large banks and brokerage companies. This process can continue to build over many years as bonuses get bigger and bigger, and eventually, the bull market turns into a mania.

We cannot blame testosterone for all of the collective insanity of the subprime mess. Still, it probably helped – the $40 million bonuses and salaries for traders and $100 million-plus compensation for CEOs affects successful traders psychology helps to build testosterone levels and tends to make humans think there are a lot smarter than they are.

Cortisol

Another Steroid that effects trader behavior is cortisol otherwise as known as the stress hormone or the anti-testosterone hormone. It has the opposite effect on trader’s behavior, lowering the appetite for risk across an entire spectrum of decisions and affecting successful traders psychology. Trading failure leads to a rise in levels of cortisol so that this hormone rules the bear market, and seems to have firm control of Mr. Market today. Cortisol can build if bad trades continue for an extended period to the point that the trader essentially becomes unable to initiate a new position.

The laws of financial boom and bust, it turns out, may have more than a little to do with male hormones and the effect they have on successful traders psychology, but hormones only part of the markets underlying irrationality. Coates set out to explain patterns of behavior that observed in his previous life on the trading floor, and his research offers valuable insights into the exploding new field — the biology of risk.

Traders (whether they are individuals, investment managers, or institutional investors) place their bets and live with the results. Coates finds biology tends to drive them to irrational exuberance and then an equally irrational pessimism. Risk concentrates the mind — and the body — like nothing else, altering our physiology in ways that have profound and lasting effects. What’s more, biology shifts investors’ risk preferences across the business cycle and can precipitate high volatility in successful traders psychology.

The Current Market

The good news is that Berkshire Hathaway is making new 52 week highs, so that is improving our investment results, but for the market as a whole, it is three days up and three days down and going no place. The best that can be said is that we are another month closer to the end of a long term bear market. Even though equity prices have made very little progress in the last twelve years, corporate earnings have been increasing at about 8% per year.

The P.E. ratio of S&P 500 stocks’ operating earnings has dropped from a very risky 28 in 2000 to moderately undervalued 11 based on 2013 estimates. One thing is clear: with prices going no place and earnings increasing year after year, there is a lot less risk in the market today than there was twelve years ago.

As Selby Davis once said, “you make all your money in a bear market, you just don’t know it till later.” The bear market is when you can buy good stocks cheap, and you should be able to establish the positions that will allow above-average investment performance for many years when the bull market returns.

The best measure of the market’s current irrationality can be found in short-dated government security markets. Currently, investors are eager to hand over money in exchange for sovereign debt yielding less than nothing. At the end of last week, two-year obligations of the governments of Austria, Denmark, Finland, Germany, the Netherlands, and Sweden all were yielding less than zero. Whereas, Berkshire Hathaway with less “real” long term risk than most Government credits (in my opinion) offers an earnings yield of 6.3%, if include look-through earnings. This willingness of investors to except a negative return lends to the market a strong flavor of panic and makes one wonder about the successful traders psychology.

08/01/2012



Leave a Reply Cancel Reply

Your email address will not be published.


Comment


Name

Email

Url


Blog Archive

2020

  • The Stock Market

2019

  • Behavioral Investing

2018

  • Trumped
  • Warren Buffett vs Wall Street
  • Globalism, 1982-2000 Bull Market

2017

  • Volatility Underlying Calm Market
  • What’s new with CB&I?
  • Passive Investing
  • Economic Cycles
  • Current Stock Market 2017 Comment

2016

  • Global Plastics Summit Highlights
  • Value Investing vs Index Investing
  • How to Play an Index Bubble
  • Successful Investors
  • Is the Market Overvalued?
  • Operating Earnings
  • Article by investment manager in Bay Hill Living
  • Building Foundation

2015

  • 3G Culture – Dream Big
  • Myopic Loss Aversion
  • CBI Nuclear Energy
  • St Joe Company
  • What’s in a Word? Plastics.
  • Are Bonds Safer Than Stocks?

2014

  • Chicago Bridge and Iron
  • CAMEX 2014
  • Global Economy October 2014
  • Fluor Corporation
  • Interesting Quotes from Daily Journal Annual Meeting
  • The Daily Journal Annual Meeting
  • Albemarle Corporation
  • Triumph Group
  • The American Energy Revolution
  • Singapore

2013

  • St Joe Company Update
  • Hedge Fund Managers
  • Triumph Group Inc.
  • Bitter Brew
  • An Antifragile Portfolio

2012

  • Leucadia National Corporation
  • This Time it is Different
  • Successful traders psychology
  • St Joe Company
  • Learning from Pain

2011

  • Long Cycles – Part II
  • Long Cycle
  • Nasty Month for Market
  • Make a Buck with Fortescue Metals Group
  • Berkshire Hathaway Look Through Earnings
  • St Joe Company Inc
  • Successful Investment Management
  • A Look Into Latin American Market
  • The Mother of all Quarters
  • 2010 Investment year results

2010

  • Fault Lines
  • US Market 2010
  • Berkshire Hathaway Third Quarter 2010
  • The Stock Market 2010
  • Berkshire Hathaway Second Quarter 2010
  • Berkshire Hathaway Performance
  • Long Term Greedy
  • Goldman Sachs
  • Berkadia and Leucadia
  • USG corporation
  • Berkshire Hathaway 2009 2010
  • Why Capitalism Works

2009

  • The Lords of Finance
  • The $44 Billion Dollar Train Set
  • Berkshire Hathaway 3rd Quarter 2009
  • Career Risk for Investment Manager
  • Berkshire Hathaway financial statements
  • Berkshire Hathaway Preferred Stock
  • Moral Hazard
  • Credit Default Swap
  • The Shadow Banking System
  • Learning Things the Hard Way
  • Our C-System
  • 2008 Investment results

2008

  • Investment Risk
  • Bear Markets
  • Generational Events
  • Orange sheets – Money is doing better
  • Inflation Not The Problem
  • Tipping Point
  • Long Term Capital Management
  • Financial Insurance
  • Western Refining Inc
  • Berkshire Hathaway Year To Date
  • Berkshire Hathaway Cash Flow
  • 2007 investment results

2007

  • Investment results 4th Quarter 2007
  • Greenspan on Inflation
  • Berkshire Hathaway Third Quarter 2007
  • Berkshire Hathaway Operating income 2007
  • Berkshire Hathaway Hedge Fund
  • Leveraged Buyouts
  • Stability Unstable
  • Weak Dollar
  • Berkshire Hathaway Chairman’s Letter
  • Steel Dynamics
  • Breakwater Resources
  • 2006 Investment year results

2006

  • New Investment Stocks
  • Equitas
  • Berkshire Hathaway Third Quarter 2006
  • Hurricane Synergy
  • Berkshire Hathaway Second Quarter 2006
  • Fat Pitch
  • Perfectly Obvious
  • Berkshire Hathaway Growth Rate
  • Berkshire Hathaway First Quarter 2006
  • Berkshire Hathaway Annual Report 2006
  • Inflation Is
  • 2005 Investment year results

2005

  • Exogenous Events
  • The Easy Money
  • Look-Through Earnings
  • High-Risk Mortgages
  • Unintended Consequences
  • Rydex Ursa Fund
  • Warren Buffett Premium
  • Private Equity
  • Latticework Mental Models
  • Buffett’s Lackluster Performance
  • 2004 Investment year results
  • Professor Smith’s Second Bubble

2004

  • Hedging Currency Disaster
  • Risk Assessment
  • Too Many Bears
  • The Chinese Century?
  • Patterned Irrationality
  • Timber
  • Costco’s Cash
  • Physics Envy by Charlie Munger
  • Asset Allocation Berkshire Hathaway
  • The Balance of Payments
  • 2003 Investment year results

2003

  • Hedge Funds
  • The trade deficit is not debt
  • Secular Bear Market
  • Which Index Funds?
  • A Different Drummer
  • Costco’s Float
  • The Power of Float
  • Berkshire Hathaway Annual Meeting 2003
  • Psychology of Human Misjudgment
  • Sitting on the Sidelines
  • Berkshire Hathaway intrinsic value
  • 2002 Investment year results

2002

  • Insurance company Moats
  • Bond Bubble
  • Berkshire Hathaway Cash Flow 2002
  • Behavioral Economics
  • The Bear Market 2002
  • Greenspan Put
  • Second Quarter Cash Flow at Berkshire Hathaway
  • Berkshire Hathaway Annual Meeting 2002
  • Red Wire – Green Wire
  • Stupid FED Tricks
  • The Bottom Line
  • 2001 Investment year results

2001

  • Don’t Fight the FED
  • Buy and Hold? – It all Depends
  • Ben Laden and Berkshire Hathaway
  • The Dinosaurs Dance
  • Costco Moat
  • Bubble Watching
  • Sit on your Ass investing
  • Berkshire Hathaway Annual Meeting 2001
  • Carnival Cruise Lines
  • 450000 Square Ft Furniture Store
  • Lunch Money Indicators – Annual report
  • Other People’s Money

2000

  • Bear Tracks
  • Build It and Money Will Come
  • Efficient Stock Market
  • Style Drift
  • Lunch Money Indicators – Options
  • Identifying Problems
  • Small Retail Stocks
  • Charlie Munger comments
  • Big Al and the Bubble Machine
  • Berkshire Hathaway Cheap
  • Index Funds
  • 16 rules for investment success
Make an appointment or contact us by phone: +1 (689) 246 49 49
© 1999 - 2022 Losch Management Company
Support by Global AGM