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A Penny-Stock Trader's Diary "Our Brains Are Hard-Wired To Get Us Into Investing Trouble"

Tyler Durden's picture





 

Originally posted at The Idiot Tax blog,

I'd been watching the stock for at least a month. A small time oil & gas company in Africa. It managed to secure a huge land position for a company of its size. Looked very promising, well funded for some time. Management previously had success putting together a similar land position with another company before it was swallowed early. But, still highly speculative.This one wouldn't be dropping a drill on dirt until late 2014. Maybe 2015.

Being a stingy bugger and without a catalyst in the market, I kept sniffing around for a while before I finally slid my buy order in at 18.5 cents - this dude wasn't going to pay the current market price of 20 cents! Maybe even 18.5 was too much. When it dropped to 19.5, I began to believe my order would get filled, but then when it hit 19 cents my mind started to desert me.

"I could get this for 18 cents."

Volume. There wasn't a great deal of it. In fact it was being pushed down on mild trades. Someone needed a new flatscreen or wanted to get their kid Optimus Prime for Christmas. There was no prospect that enough shares would be dumped and I'd get my fill at 18 cents. The holding was tight and the sell side was thin. Regardless, I hit the amend button and my order dropped down the queue to 18 cents.

I assume you know where this story is going. You're probably wondering why I'm telling it when it inevitably makes me look like an idiot. So why tell? I've read countless explanations of investor psychology in a general sense, but rarely does anyone put their name to a calamity, or at least their nom de plume.

Everyone can recognise these paragraphs by Heidi Lefer and Ildiko Mohacsy, in  Journal of the American Academy of Psychoanalysis and Dynamic Psychiatry, but there's little personality to it and no experience. 

Economic bubbles and crashes have occurred regularly through history-from Holland's 17th century tulip mania, to America's 19th century railway mania, to the 1990s high-tech obsession. Though most investors regard themselves as investing rationally, few do. Instead they react collectively, buying high and selling low in crowds. Being subject to the illusion of control, they follow regressive behavior patterns and irrational, wishful thinking. They are victimized by their own emotions of hope, fear, and uncertainty. 

When people feel doubt and panic, they regress to an earlier stage either individually or en masse. Under stress, they revert to affect (Mohacsy & Silver, 1980). Such mobbing has an obvious psychological counterpart in the market. Here, crowds are governed by wishful thinking. "Investors are coached to believe that a stock is a better buy when the price rises, that it's 'safer' to join the crowd in betting the price up and 'riskier' to buy a stock declining in price" (Vick, 1999, p. 7). Investors also join a crowd to minimize regret. If something goes wrong, they know others behaved the same way. 

We recognise it when exuberance makes charts go vertically up or when stone cold fear pushes them ruthlessly down, but our ego inevitably makes us shy away admitting that we take part in any function of it - "that's those other sheep". We're merely unemotional observers, until we aren't. Is anyone going to admit they were buying in the final moments before the last bitcoin crash?

It was inevitable that a few short days after Wall Street lovingly embraced Bitcoin as their own, with analysts from Bank of America, Citigroup and others, not to mention the clueless momentum-chasing, peanut gallery vocally flip-flopping on the "currency" after hating it at $200 only to love it at $1200 that Bitcoin... would promptly crash. And crash it did: overnight, following previously reported news that China's Baidu would follow the PBOC in halting acceptance of Bitcoin payment, Bitcoin tumbled from a recent high of $1155 to an almost electronically destined "half-off" touching $576 hours ago, exactly 50% lower, on very heave volume, before a dead cat bounce levitated the currency back to the $800 range, where it may or may not stay much longer, especially if all those who jumped on the bandwagon at over $1000 on "get rich quick" hopes and dreams, only to see massive losses in their P&Ls decide they have had enough.

There will be a strange irony, in that anyone you talk to with a bitcoin experience will have left the building at $1100 - "it was looking bubbly, so I took a profit." Hmmm. The drip that bought at $1155 will be cloaked in anonymity, unless $2200 is later smoked.

Back to me, and the price my mind had agreed pay - 18.5 cents was hit. But where was I? Yeah, I'd cooly (or so I told myself ) shifted another gear down and was expecting to get my happy ending at 17.5 cents. As the share price firmed again, juddering between 19.5 and 20 cents I meekly snuck back to 18.5. At 20 I snuck up to 19, as I wondered whether it might go to 20.5. Of course it did, before coming back to 19.5, at which point I had enough steel to leave my order at 19.

In the midst of this circus, late on a Friday, the buy side appeared to firm considerably and immediately it looked a better buy again - "buy now and I'm with the crowd." After a fortnight of courting and several times being left with my frank in my hand, maybe it was time to make the move and just get my fill at 19.5. But, but, but, this was Friday afternoon and anything could happen over the weekend. Rating agency downgrades, terrorist attack, tsunami, nuclear disaster, alien invasion, apocalypse. And I'd still have to settle on Wednesday!

And something did happen. First it was a market announcement after the close on Friday that their seismic program had shown positive results. Damn, I assumed this was going to cost me another half cent! Then on Monday  - TRADING HALT.

11 minutes before open on Monday morning. I spent most of Monday cursing my stupidity while muttering F-U under my breath. On Wednesday morning the announcement came out - an unsolicited equity placement at an 18% premium to the previous close. A significantly rare and positive event. And on open, the share begins trading at 23.5 cents.

Where's my order? Oh I'd moved it to 22 cents now. Sigh. Yeah it was happening all over again. Though a few price bumps up to 24 and 24.5 cents during the day had me edgy. Now the urge is to get ahead of the game because this is surely going higher.

What didn't help throughout this brain mincing was my constant contact with a share trading forum. Those great analogies that describe a share price ready for take off (see, I just used one then!) were flying into my eyes like poison darts. Common sense is blinded and it further makes me think I gotta get in!

Toot! Toot! Buckle up your seatbelts! The floor is in! A couple of cents will be meaningless soon! 

Then there's also talk of the big boys buying, holidays (not just theme parks, your own private island), early retirement and Ferraris. Sitting on the sidelines and kicking yourself while reading this is a little unnerving, but a slap to the face and you quickly regain perspective. The real issue becomes the now moving share price. Even if you block out the chat room noise, with every half cent it's somehow a better investment - or speculation as it were. Yet last week every half cent movement downward made it waft like sun-baking salmon. Someone's selling, something must be wrong. Drag that order down so you won't overpay!

 

After again playing tag and miss with the price for most of the day, a gap opened up at 22.5 towards closing time. That was the entry point. No more mental gymnastics trying to second guess the next movement - if I got hit, I got hit. I placed my order. It sat near the top of the queue and with one foul swoop at 3:51pm I became a shareholder. A few minutes later the price went back to 23 cents and that's where it closed for the day. After two weeks of games, and being led around by my nose, it was a very painless exercise. Yet I had little control until I pinched my brain in those final moments. There was some satisfaction that I paid less than the premium placement that instigated the jump in price, but I still paid 21% more than if I'd just left my initial order 18.5 cents.

Again, from Heidi Lefer and Ildiko Mohacsy, in  Journal of the American Academy of Psychoanalysis and Dynamic Psychiatry - I'm guilty as charged.

Our brains are hard-wired to get us into investing trouble; humans are pattern-seeking animals . . . .Our brains are designed to perceive trends even where they might not exist. After an event occurs just two or three times in a row . . . the anterior cingulate and nucleus accumbens automatically anticipate that it will happen again. If it does repeat . . . dopamine is released . . . .Thus, if a stock goes up a few times in a row, you can reflexively expect it to keep going up . . . .Brain chemistry changes as the stock rises, giving . . . a "natural high." You effectively become addicted to your own predictions.

At last close the share price sat at 31.5 cents. I'm in, I'm ahead and I'm finally calm. But I still can't believe how ridiculous my mental gymnastics became. I've got no clue how many trades I've completed over the years, but any time I'm buying a new company this farce reappears.

The share forums have gone wild over the company. Just by reading them the brain could start firing with thoughts of short changing your future family tree by not taking a position. I felt similar insanity that day I realised I'd be paying 21% more than I'd initially intended.

It's gone up consistently for weeks. It will keep going up, surely? No, I don't think that any longer, but that's the mental game any potential new entrant is faced with. Now, as a shareholder, I'm less concerned if it goes up or not. I just don't have to worry about being left behind if it does.

My terror now? The prospect of fighting my uncontrollable and irrational mind when it comes time to sell. Another two weeks to get an extra three cents, before eventually chasing the price two cents down?

If I can ruthlessly control my saving and spending, surely the same control can be applied to investing (or speculating).

Sooner or later I'll find out.

 


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Fri, 12/13/2013 - 22:12 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

I actually heard something on the CNBC idiot box several years ago where the talking head was saying that is was good that High Frequency Trading (HFT) was around because it removed emotion from the trading arena. No mention was made of the emotional humans who programmed the HFT algos to play off the emotional traders and other HFT algos programmed by emotional humans.

<Welcome to the insane asylum. We are programmed to fleece.>

Sat, 12/14/2013 - 05:44 | Link to Comment malikai
malikai's picture

It is a good thing. If you're trading any sort of model or technical pattern, emotion is a real killer. Sometimes you win big, sometimes you lose big. Large firms trading may enjoy the big wins some of their star traders get, but they certainly don't want the big losses. That's why automated traders are so attractive. Because they are normalizers, and they provide the promise of predictable returns (although that promise is rarely fulfilled).

Sat, 12/14/2013 - 08:00 | Link to Comment negative rates
negative rates's picture

Moral of the story: Don't count your chicks before they hatch, and don't make an egg count until the chicks grow into hens, they just might feel the need to become a tasty chicken halk treat, without a proper made roof. 

Fri, 12/13/2013 - 22:21 | Link to Comment Yen Cross
Yen Cross's picture

   Hey Cog. Merry Christmas.  I saved this Z/H link and video. I've watched it 3 times. This is what "high frequency"trading thinks of FREE MARKETS!  Listening Fonz & Doc? 

  http://www.zerohedge.com/contributed/2013-11-04/wall-street-code-released

Sat, 12/14/2013 - 06:37 | Link to Comment Manthong
Manthong's picture

A very successful surgeon friend of mine had all of his hair fall out.. stress.

Geez.. there are benefits to being a relative dumbass.

Fri, 12/13/2013 - 22:33 | Link to Comment ToNYC
ToNYC's picture

Your brain on Physics-denial: a something-for-nothing Fail.

Sat, 12/14/2013 - 00:11 | Link to Comment Bangin7GramRocks
Bangin7GramRocks's picture

Gambling is gambling. Play the ponies, bet the NFL, but please don't kid yourself that betting on penny stocks is some sort of noble profession or "investing". Good luck to you.

Fri, 12/13/2013 - 22:32 | Link to Comment Sufiy
Sufiy's picture

CEO of BTC China: China Does Not Allow Goods And Services To Be Sold In Bitcoin

We have great interview to share today with everybody excited by the Bitcoin phenomena. You can decide whether it is bubble or not at this stage now. Making your "investment decision" about Bitcoin and other 42 Crypto-Currencies, please do not forget that you are listening to modern days California Gold Rush Shovels Shopkeepers. Please note that payment services in Bitcoin are not allowed now and the main attraction for Bitcoin becomes ... "saving" and speculation, we can certainly agree with the last one. And what makes it "safe": "...because Bitcoin can not be manipulated as easily as FIAT currencies" ... no comments here.
There are a lot of interpretations about the recent ban by China for its Financial Institutions to use Bitcoin. So it is very important to get the full information about the actual rules implemented by China. Your opinions about implications of these rules for the Bitcoin's future can be different from other people, but at least we have to get to the plain field in order to make any analysis. We will point out to the excitement of the speaker with "tons of speculative money coming into the picture". And now Litecoin Pump is On. Just listen to the interview and separate hype from the facts and how the Bubbles look like this days.

http://sufiy.blogspot.co.uk/2013/12/ceo-of-btc-china-china-does-not-allo...

Fri, 12/13/2013 - 22:32 | Link to Comment Sufiy
Sufiy's picture

CEO of BTC China: China Does Not Allow Goods And Services To Be Sold In Bitcoin

We have great interview to share today with everybody excited by the Bitcoin phenomena. You can decide whether it is bubble or not at this stage now. Making your "investment decision" about Bitcoin and other 42 Crypto-Currencies, please do not forget that you are listening to modern days California Gold Rush Shovels Shopkeepers. Please note that payment services in Bitcoin are not allowed now and the main attraction for Bitcoin becomes ... "saving" and speculation, we can certainly agree with the last one. And what makes it "safe": "...because Bitcoin can not be manipulated as easily as FIAT currencies" ... no comments here.
There are a lot of interpretations about the recent ban by China for its Financial Institutions to use Bitcoin. So it is very important to get the full information about the actual rules implemented by China. Your opinions about implications of these rules for the Bitcoin's future can be different from other people, but at least we have to get to the plain field in order to make any analysis. We will point out to the excitement of the speaker with "tons of speculative money coming into the picture". And now Litecoin Pump is On. Just listen to the interview and separate hype from the facts and how the Bubbles look like this days.

http://sufiy.blogspot.co.uk/2013/12/ceo-of-btc-china-china-does-not-allo...

Sat, 12/14/2013 - 19:37 | Link to Comment Exponere Mendaces
Exponere Mendaces's picture

As usual, Sufiy is around to pump his blog, and to say nothing of consequence about China. I've already talked to my contacts in China, and this is merely a ring-fencing event versus a complete and utter ban.

They've classified Bitcoin as a commodity that private citizens can trade if they'd like, they're just making sure the banks don't start making a bunch of crazy products around them. Just like what we should've done for CDO's but hey, we have a "regulated" market where disasters never happen, riiiight>?

Anyway, the biggest exchange in China is still running, and trades are still being made. That's the actual proof. If it were as disasterous as everyone says it is, then there would be zero activity and volume would grind to a halt.

So, you can believe some blogging ranter, or you can trust your own lying eyes and see the trading volumes/ticks for yourself.

 

 

Fri, 12/13/2013 - 22:35 | Link to Comment css1971
css1971's picture

Stop thinking about prices and start thinking about percentage of your portfolio. i.e. risk.

Create a spreadsheet to do it for you.

Fri, 12/13/2013 - 23:15 | Link to Comment topspinslicer
topspinslicer's picture

If we always had a strong money (gold, silver, copper) and a mild deflation perhaps investing wouldn't be so important. One would work and save and the very act of saving in a mild deflationary strong money environment would in time reap rewards. Lot less drama.

 

Sat, 12/14/2013 - 11:04 | Link to Comment acjitsu
acjitsu's picture

My thoughts exactly.  Instead of having a sound money system and a true rule of law whereby people could just work hard and save their money because they have confidence that there money will retain value throughout the years, the people are forced to speculate in this rigged casino we call the stock market.  

Sat, 12/14/2013 - 11:29 | Link to Comment headhunt
headhunt's picture

Basically you want to live in a collective or commune?

Got obama?

Sat, 12/14/2013 - 01:11 | Link to Comment The Shape
The Shape's picture

Replicate it across every market you can think of.

No wonder pump and dumps work and real estate boards have economists hollering in the media every month with massaged stats.

Sat, 12/14/2013 - 01:21 | Link to Comment Alternative
Alternative's picture

Yeah, I'll admit: I bought 10 BTCs for $960.00 each. I'm a sucker, I lost $1,000 on that trade now.

But hey, that's nothing compared to 30 times that much loss on my gold and silver purchases since I started listening to the clowns here.

Sat, 12/14/2013 - 01:26 | Link to Comment Godisanhftbot
Godisanhftbot's picture

 Yeah, I was on record as saying the gold pump would end badly.

 

 Timing is everything.

Sat, 12/14/2013 - 02:01 | Link to Comment Burnbright
Burnbright's picture

God are you fucking serious? So you are chasing every crowded trade and then blaming others for it? I bought silver all the way from $13 to $42. Now honestly I didn't buy much after it passed $19 awhile back, before it ran up to $50. It was my mistake for not selling when I had the chance, but I most certainly did not buy at that price. Look if you don't want to get sheared like a sheep then you need to know your own reasons for buying what ever it is you are purchasing. 

It's like that line "If you don't believe in something, you'll fall for anything." It is true. I know what the value of my holdings are to me, and fuck if I am going to sell any of my PMs at this level. The trick is not being put in the position to liquidate what you have before your price point to exit. That is all. 

 

Edit:

By the way, I wouldn't sell your bitcoins just yet. Bitcoin maybe in a mania right now, but it is still in its mania phase. It might have some more leg room to run up before it finally pops bag down to reality which is closer to parity with the dollar than 1000x it. But who knows. I personally think it won't last because that is how technology is. Just think of how many times you have replaced your computer over the last decade. Money has to last, endure indefinitly, other wise it is worthless. Bitcoin needs to last another decade or more before I would even consider putting large amounts of money into it. 

Sat, 12/14/2013 - 22:13 | Link to Comment razorthin
razorthin's picture

I sold my Ron Pauls at $45 last year and just bought maples at $20.

Sat, 12/14/2013 - 01:25 | Link to Comment Godisanhftbot
Godisanhftbot's picture

 When I first invested 50k in Bitcoin at 10 each they called me crazy.

 

 Now they call me , .........................Sir

 

 

 Nah, just kidding, btc is a scam

Sat, 12/14/2013 - 01:34 | Link to Comment Alternative
Alternative's picture

Whatchya afraid of boy? That Meee meh me Mewn and Knowles will pound on your 'integrity'?

Sat, 12/14/2013 - 03:54 | Link to Comment Yen Cross
Yen Cross's picture

  It's too quiet. The blockchain is deciding if that 200 btc withdrawal is legitimate>

Sat, 12/14/2013 - 07:07 | Link to Comment Al Capowned
Al Capowned's picture

Comparing Bitcoin a revolutionary decentralised payment protocol to speculating on a penny stock is tedious as best .

It's even more stupid to compare it to a plant bulb , or a stuffed toy.

Sat, 12/14/2013 - 07:40 | Link to Comment jballz
jballz's picture

 

 

 

This article is why retards shouldn't be allowed to write blogs. Not sure if it is right to let them "trade" but hey free markets so fuck it.

Waste of ZH space either way though.

Sat, 12/14/2013 - 08:13 | Link to Comment Iam Yue2
Iam Yue2's picture

Is anyone going to admit they were buying in the final moments before the last bitcoin crash?

Who cares, the Bitcoin propagandists have airbrushed such people out of history. ..... In the happy land of Bitcoin, nobody ever suffers a loss, and everybody gets to buy that always hoped for Lamborghini.

Sat, 12/14/2013 - 10:12 | Link to Comment jballz
jballz's picture

 

what "crash"? Fuckin thing went up 100% in a month and 42,000% in a year. High was 1240 and currently 900, you think the market gives a shit about a 300 pullback off the highs?

Oh its only up 30,000% for the year. It CRASHED!!!

Fuckin morons cant read any more than a yellow headline that tells them what to think.

Im not even a bitcoin holder just can't stand the stupid anymore. If bitcoin CRASHED wtf is a $700 gold correction... ARMAGEDDON STRIKES GOLD MARKET!!!!

Full retard, bitchez.

And shame on you tylers for yellow headlines

Sat, 12/14/2013 - 10:13 | Link to Comment jballz
jballz's picture

wish I could junk you twice, so 

 

-1, bitch

Sat, 12/14/2013 - 11:25 | Link to Comment pipes
pipes's picture

Is anyone of you anti-coiners going to admit there was no crash?

 

That aside, had i been buying any, I would admit it...AS I ADMIT I WAS BUYING METAL TOWARD THE HIGH END OF THE RUN...

 

Because I believed then -AS NOW - that there is still massive upside in the long run.

 

You think that somehow YOUR perception of Bitcoin obligates believers in Bitcoin to feel stupid about $1200...it doesn't...it's just natural growing pains.

Sat, 12/14/2013 - 11:13 | Link to Comment acjitsu
acjitsu's picture

Crash in BitCoin?  Probably just a nice correction/consolidation, just like Gold and Silver.  Maybe it will revert to the mean, around $400 or so.  Maybe not? Who knows? But who cares? I don't like Bitcoin but it's a very compelling currency, I think a Beta test, that will spike in price again at some point(just as Gold and Silver will do), if in fact it corrects more.  We should be grateful that there's more choices out there.  When Bitcoin spikes again, so will Gold and Silver (probably more so) since this will be reflecting a time when inflation starts really showing itself in prices and confidence in gov't starts to be lost.  Embrace the new currency because once the world figures out that NOTHING beats PM's as a store of value/labor/confidence, it's go time baby !!!

Bitcoin chart:

http://blockchain.info/charts/market-price

Typical bubble chart:

http://www.google.com/search?q=stock+bubble+chart&client=safari&rls=en&s...

Coincidence? Maybe? Maybe not.... ;)

 

 

Sat, 12/14/2013 - 11:24 | Link to Comment headhunt
headhunt's picture

I think this guy is getting my computer trades via the NSA

Sat, 12/14/2013 - 14:25 | Link to Comment Bryan
Bryan's picture

Story of my life, right there.  How do we break this stupid emotional game?

Sat, 12/14/2013 - 16:21 | Link to Comment ejhickey
ejhickey's picture

Only way to win is not to play - WAR GAMES

Sat, 12/14/2013 - 14:39 | Link to Comment steveo77
steveo77's picture

Interesting FACT
Tiger Shark attacks in Hawaii up 400% since Fukushima

Hmmmmm.....not a good idea to kill the food chain in the HOME PLANET's largest ocean, there will be repercussions.

I used to dive Maui all the time, spear fish, gather crabs and lobsters at night.    Sheesh, many of the Tigers are exactly where I used to dive in Makena Maui

http://nukeprofessional.blogspot.com/2013/12/apex-predators-in-hawaii-ar...

Sat, 12/14/2013 - 15:14 | Link to Comment Kirk2NCC1701
Kirk2NCC1701's picture

It's true about our brains being Pattern-Recognizing bio-machines.  The H2 History Channel had a nice mini-series on "Your Bleeped Up Brain". 
http://www.history.com/shows/your-bleeped-up-brain

Great episodes on how senses and brains are so limited, and minds so fool-able and fallible.  Humbling.  Amazing we miss some basic things, how easily we can be distracted, how we often make wrong assumptions to fill in the blanks, and flawed our memories can be.  It's amazing that we function as well as we do.

http://www.history.com/shows/your-bleeped-up-brain/videos

or on Youtube: https://www.youtube.com/results?search_query=your%20bleeped%20up%20brain

I guarantee you that you'll be entertained, educated and delighted.  Enjoy.

p.s. It's so difficult to be (or remain) a disciplined & principled investor, when we'd often rather run with the herd (carnivore).  Maybe hunting with the pack (carnivore) is more profitable, and lets you end up higher on the food-chain?  The challenge is to morph into a carnivore (wolf), when we've been raised as herbivores (lambs, sheep) by our culture and religion.

 

Sat, 12/14/2013 - 16:36 | Link to Comment Its_the_economy...
Its_the_economy_stupid's picture

ps

 

the fed made it easy.

 

Sat, 12/14/2013 - 15:19 | Link to Comment ToNYC
ToNYC's picture

Investment Time Horizon = T - (what Bitcoin?)

Sat, 12/14/2013 - 18:11 | Link to Comment Downtoolong
Downtoolong's picture

Somebody still ain’t telling the whole truth.

Now let’s hear the even better horror story which applies to 95% of all penny stock and day traders. You know, the one where you go through all these psycho-emotional gyrations and also lose 50% on your investment in 3 days instead of gaining it.

 

Sat, 12/14/2013 - 18:54 | Link to Comment Robert of Ottawa
Robert of Ottawa's picture

Classic market behavior and personal emotions.

The important thing is that you follow your plan. If you buy asomething speculatively witg the intent of selling at 50% profit, when that thing hits the target price, sell. OK you may have missed out on another 300% profit, but you made your goal. and avoided the risk of selling at a loss.

Buy low, sell high and stick to the plan.

 

Sat, 12/14/2013 - 21:13 | Link to Comment auric1234
auric1234's picture

Legendary speculator Jesse Livermore said: there's a time to buy, there's a time to sell, and there's a time to go fishing.

All this time you spent timing your purchase you should've been fishing.

 

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