The official reaction to stock markets varies from a strident "Den of thieves and gamblers" to a glowing 'Best leading indicator of the economy's health'. The schizophrenia varies along with the needs of governments to access funds from that ineffable cornucopia. In truth, the markets themselves are schizophrenic because their resporise to stimuli is a vast agglomerated mass of expectations. Hence the eternal market tussle between bear and bull, which is an accurate enough reflection of economic cyclicality, but of a considerably exaggerated order.
Given the historic mood swings, it is surprising that efforts have been made to study market psychology only recently. In a sense, the quants have accepted tacitly that mathematical models don't explain everything. The inexplicable can only be treated in terms of behavioural finance - hence the study of the psychonomics of the market.
Jon Myersis a well-known name in Trans-Atlantic market circles. He is also a successful personal investor and shorn of the jargon, appears to subscribe to the same "reflexivity" hypothesis trotted out by Soros in his Crisis of Global Capitalism. Namely, Myers accepts that market momentum often enters a self-reinforcing feedback loop that drives prices long bey-ond the point of justification.
Unlike Soros, he attempts to explain this in terms of investor psychology and marry it to standard micro-investment techniques. Interestingly, he uses indicators of both technical and fundamental analysis, suggesting that he lacks the usual biases of most investors who end up converts to one or the other school. Thus the advancedeclines and relative stre-ngth index weds seamlessly with Return on Equity and Price-earnings in Myers analyfical models.
Myers also goes a long way beyond reflexivity in his attempt to value the" weightless" orintangible factors that go into determining a stock's market value. This is currently an extremely theoretical exercise since generally acceptable ways of measuring even the two commonest intangibles of human resources and brand-values don't exist. But even an attempt to deliberately rate the intangibles is liable to keep the gullible away from the most egregious errors.
He also attempts to put together a checklist of the typical matrix of blunders that losing investors make.This chapter covers not only the comnwn failings of greed and subjectivity, it is a litany of the corn monest scam schemes fly-by-night companies rampant share price manipulation etc. India, of course, has been racked by everything from the Scam (which was actually half-a-dozen scams),to runaway NBFCs, to unregulated plantation schemes, to fisted companies which disappear after their IPOs. It's cold comfort to know that these things happen even in developed markets.
This is not an easy book to read. While written clearly enough for the most part it smacks a little of the MBA term paper at certain points.'Ibe jargon is a trifle excessive, the impressive-looking charts don't really add value, some fundamental questions are glossed oven It does have the feel of a Power Point presentation. But in mitigation it mustbe admitted thatthe approach itself is new and the author could be forgiven the lack of readability since he is often forced to introduce an entirely new concept complete with its vocabulary, and then skip rapidly to reach the point of specific interest.
I'm not sure that this is a compliment, but the first time I came across a similar psychological approach to trading w
