“Buy low/sell high” is a common mantra when it comes to investing, but unsurprisingly most investors fail to accurately identify when a stock price is truly at a high or low point when buying or selling. New investors will look for indicators that they believe are signals that the price of a stock is about to go up, triggering a purchase, or that the price is about to drop, triggering a sale.
Most institutional investors know that this attempt to time the market is poor practice. In fact, around 90% of short-term asset traders will underperform the market as a whole or will lose money entirely.
That isn’t to say that everyone should keep all their money in a large index fund that just follows the general growth of the market, but it is important to know the reason why most investors fail in order to predict how they will act and take advantage of that knowledge.
Here’s a piece of advice I often impart to new investors: The market is a lion. Everyone from little ol’ me to the largest institutions in the world comprise a herd of gazelles. Lions eat gazelles, but only from the back of the herd.
This isn’t an endorsement of speed in the way one might think of HFTs, execution latency, and capturing arbitrage or even preventing slippage. Rather, it is about understanding human behavior when faced with the perception of a trend and the need to benefit from “herd” behaviors in order to outperform the broad market. Put another way, the only way to outperform the herd, with or without the benefit of luck/randomness, is to take a contrarian position by identifying when the rest of the market has been either wrong OR too right and is in need of a correction.
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A common market refrain is “In the short-run, the market is a voting machine, but in the long-run, the market is a weighing machine.” This could be considered an over-simplification. Technically, the market is an auction, a place where buyers and sellers meet to exchange assets for currency. In the case where a large number of buyers meet a small number of sellers of a given stock, then demand far outpaces supply, and price appreciation occurs.
Vice versa when a smaller number of buyers meet a large number of sellers.
To return to the herd analogy, each buyer & seller is a gazelle. The goal is to predict how elements of the herd are likely to act, thus giving indication on supply/demand imbalances and thereby price movements.
To accomplish this, we measured investors’ psychographic trait distributions and applied them to corrective deep game theory. This analytical process allows us to make predictions from market behavioral data to know when the herd is likely to move. The tool we created to do this is called OVTLYR.
Essentially, OVTLYR has turned “herding” (sometimes also called the “bandwagon” effect) on its head by providing summary visibility on market participant inclinations so that our ‘gazelles’ can identify where the herd is likely to turn next. When you know where everyone else is moving it allows you to consistently, repetitively make investment moves which are likely to benefit from forthcoming market movements rather than suffer from them. That way you can use that advanced notice to make sure you never find yourself at the back of the herd near the lion pride.
Written by investor behavior experts Mark Gorzycki and Mahesh Ka
