Introduction: How to correctly understand the psychology of losing money?
When I was conducting research in Northeast China in March, a futures market expert was optimistic about American wheat. I happened to be studying wheat data and quickly agreed: the largest adjustment in American wheat history was in four to five years, but now the price has fallen from its previous high for six years and has returned to the level of more than a decade ago. Regardless of time or space, wheat prices should rise! Another colleague also said that there are reasons for the rise in US wheat prices. Then, the big shot sighed leisurely: Alas, I found that whenever I ask the people around me after I place an order and everyone agrees, I basically lose money. If everyone opposes, then I am definitely making money. This wheat deal
However, during the research, he said that he was doing long contracts for manganese silicon and silicon iron in the middle line, which everyone thought was absurd because these two contracts did not have much volume at all. His warehouse building time had to be calculated on a weekly basis, and it was very difficult to buy them one by one. He said it fell to the cost price of the enterprise. As a result, he was ridiculed by his fellow travelers and could only give a bitter smile.
A month has passed in the blink of an eye. I looked today and found that the decline in wheat prices in the United States in March has reached almost 5%. Going long on wheat will at least result in a loss this month. The curse of ‘if everyone agrees, there will be losses’ seems to have regained its power. However, the two unknown contracts of manganese silicon iron and silicon have unexpectedly increased by more than 10%, becoming the most dazzling varieties in March. It is indeed the most precious thing that no one cares about.
In fact, it’s not just futures investment. In the stock market, the sudden influx of retail investors has almost no chance of making money; In the past few years, tens of thousands of clients with small and large funds have died on platforms such as P2P. Many of them have invested their money one after another with relatives and friends, but in the end, they cannot even retrieve their principal; Even in social life, we can see more clustering effects. For example, in recent days, the internet has paid great attention to the Huan case. It seems that any media or self media that does not talk about this case is equivalent to self isolation from the people.
Since we’re talking about Yu Huan’s case, I can’t avoid saying a few words. Setting aside the background of high interest loans, anyone who insults their mother in front of their son, if the son cannot stand up in anger, is not considered a bloody man. So, it is understandable to wield a knife to protect one’s own interests. But this case did not involve wielding a knife during a moment of humiliation, and its defensive nature was weakened. The local judicial authorities’ determination of intentional injury is not considered a serious mistake, but they should consider the element of excessive defense. The sentence of life is a bit heavy, and the verdict of not guilty is also a bit excessive. If the sentence were shorter, it would probably not have caused such a strong backlash as it is now.
You see, as I spoke, I couldn’t help but speak nonsense like everyone else. What is this? This is the ‘crowding effect’.
The crowding effect is that people will involuntarily move to crowded places. It is similar to the ‘conformity effect’. The conformity effect emphasizes “following”, and many people are doing that, so you can’t do it if you don’t. The crowding effect emphasizes the “zha” effect, where everyone is there. If you don’t go, how can you do it?
Whether it’s gathering together or following the crowd, it’s essentially the same: it’s rooted in a deep sense of fear in human nature. Imagine in ancient times, wild beasts were everywhere, poisonous insects were rampant, and a solitary individual could not survive. Unity is powerful, and if we hold together as a team, we can cope with difficulties and crises. So, conformity and clustering have become a natural habit for people.
It is precisely because of this habit of conformity and clustering that human society has families, clans, tribes, countries, and various forms of organization: schools, enterprises, armies, governments, small groups, parties, schools, and so on. Everyone gathers firewood and the flames are high, gathering together to meet everyone’s needs for warmth.
Since clustering and conformity have almost become human nature, this phenomenon is inevitable in the investment field. The following can all serve as evidence:
——No matter what stocks you buy or what futures you open a position in, do you always feel uneasy? Are you going to search for fellow travelers? I will consult with experts and hope that they can express opinions consistent with your views on opening a warehouse. You will talk to your relatives and friends, hoping that they will support your approach. Will you go find everyone you can meet around you and want to ‘share’ with them, listen to their opinions? I will search for stocks and futures online, find QQ groups, search on Weibo, and WeChat groups. Especially if your investment amount is large and you are restless, you will be more eager to find like-minded people.
——When you hold a position, you only like to hear opinions that align with your investment direction; When you see opposing opinions, you will pretend to block them or angrily rebuke them. If you think this viewpoint is reasonable, you will quickly seek confirmation from others and always make sure that their views are consistent with yours. At this time of year, you often can’t make up your mind. It depends on whether there are more people who support you or those who oppose you, and you have to make a choice based on this.
——The opinions of big shots are the most important. Because you subconsciously believe that big names have been successful in the past and will be successful in the future, and that there are more and more people gathered around big names. So, the actions of big shots are more referential. So, you will search the world for big names and their opinions. If you get to know them by chance, you might as well seek their opinions on every investment. He has done too much, you will quickly follow up and suspect that your short selling strategy is wrong. If he buys a certain stock, even if it’s just a mention, you’ll quickly take a second look. If he sells it, you wish you could cut it all at once.
——The opinions of the masses are amplified. In QQ groups, WeChat groups, Weibo groups, Moments, forums, APP communities, and other places where investors gather, everyone will search for information that is consistent with their investment, and will consider various chaotic information as valuable. So, someone in the group said, as long as it’s similar to their investment, they can’t get close to it immediately. Most of the time, you feel embarrassed to express your opinions and would rather wait for others to speak. When one opinion prevails within a group, it is easy to turn into collective action. So, a certain group often has a consistent long short style. Even the big Vs on Weibo have similar fan behavior – for example, recently Yang Tao’s fan positions were heavy, while the fan positions of several other big Vs were light, which will seriously affect the voting results of the position survey.
——Spend money to buy information. Some famous investors may spend a lot of money on buying basic information, while ordinary investors spend money on buying other people’s information. So, the “Q&A” mode became popular, spending money to ask questions and letting big shots answer them, ultimately seeking peace of mind. So various fee based groups emerged, with scammers dominating and making money really easy. Some people also spend money to buy insider information, hoping to obtain insider information, and so on.
For the melon eating masses, selling empty positions in the cowhide market is always the most difficult. Because that means he doesn’t have any space left! And everyone around them has space. Selling in a bear market is also difficult because everyone is comforting each other and comparing who is losing more. They don’t sell, why do I sell? Of course, a volatile market cannot be sold. What if a bull market comes? So, retail investors always fill their positions in some locked up stocks, making it difficult to have opportunities to make money. Once the losses are reduced, they will be eager to sell. As a result, the fate of chives has always been difficult to change.
That being said, there is no need to criticize or ridicule the behavior of crowds and conformity. Because we are all like this. Today, I saw on Weibo that an investor named ‘Old Speculator’ wrote this sentence:
How do many futures traders lose money? At the beginning of the market, if you dare not enter the market, or if you enter the market and cannot withstand the repeated fluctuations of the market, you will be shaken out. Then the market will move in the direction you expect, and the more you go, the more you feel uncomfortable. So, you finally chase after it again. Once you enter, you will encounter a reversal market, which will cause account losses. If you can’t bear the loss, you will cut it. After cutting the market, you will continue to move towards opening positions, and then chase after it again. After several repetitions, you will plan to resist the order, and once you carry the order, you will encounter a reversal market.
Did you see that? This is the emotional journey of a real futures speculator losing money: after detailed research, they have decided to open a position! Be timid, take less. You did it right, sell it now! Selling wrong, buy it with extra money! Oh, I’m wrong again. Did I research it wrong? It’s broken. Sell it now! Selling it again is wrong, grandma. Buy it again with a higher price. Oh, wrong again, hurry up and chop. Oh, it seems like I chopped it wrong
What shall I do? Find someone who understands and ask. You see, this is conformity and the source of crowds. I am so scared, my inner fear is irresistible! Running into the middle of the group and seeking comfort for the soul seems to be the only way out.
However, when you have this heart, investing and making profits is far away from you. All conformists, all those who like to gather together, theoretically cannot have much return on investment.
Because the pinnacle of investment is always a world of solitude.
If you are not against humanity, if you cannot take a different path from the public, then you are a member of the public. How can everyone make money, Volkswagen? In the futures market, the probability of individual investors surviving for five years is less than 1%. In other words, if 10000 individual investors enter the futures market with money today, it would be good to have 100 alive in five years – the rest have already left with losses. Of those 100 who are still alive, about 90 have invested money from home.
In my previous article ‘Who Can Make 1 Billion Yuan in the Futures Market’, the big names mentioned all have a common characteristic: to fight in positions that others cannot understand or support, and to fight alone in the midst of multiple killing opportunities. For example, in 2008, Lin Jun shorted copper and was forced to reduce his holdings due to three limit downs. Although making a big profit, everyone is facing a choice: after three consecutive limit downs, should the market stabilize in the future? Who dares to open a short position on the fourth limit down board at this time? Lin Jun took the fourth limit down position and continued to short, ultimately making a profit.
In theory, the opinions of big shots are important, but during that period in 2015, Mr. Fu Haitang went long on iron ore and cotton varieties more than four times, and eventually liquidated and left due to meeting stop loss conditions. At the end of the year, when the price was extremely low, iron ore suddenly rose. When someone asked again, he said: it’s reversed, a bull market is coming. The person awkwardly said, ‘Here, I’m afraid it’s a rebound.’. Then, they missed out on a market with profits dozens of times higher.
Looking back at the end of 2015, the commodity market was bleak and various commodity forward contracts continued to be discounted. All rebounds seemed to be opportunities for survival. Who dared to continue to go long? Only by doing it against human nature, ‘where everyone goes, there is no way’, and doing it against the behavior of the masses, can there be a chance to win.
In fact, it’s not just investment opportunities that should go against the public, but also investment methods. In the 1920s and 1930s, when the US stock market lacked analytical tools, whoever could master technical analysis methods first would easily stand out and make money. But once technical tools become popular, it becomes difficult to start from technical analysis. This is like the Chinese stock market 20 years ago, when HarmonyOS was making initial judgments, mastering some technical analysis methods was considered fashionable, but today, when the world is filled with K-lines and moving averages, using such methods to capture opportunities would be laughable.
In the mid-20th century, American fund managers played “Pretty 50” and later suffered a crushing defeat. I didn’t expect that more than 40 years later, Chinese investment managers would also play this game, and later they would still fail. Even today, the phenomenon of public funds’ “embracing each other for warmth” is still common. To put it simply, this is called cowardice and fear that one has to deal with. To put it more broadly, it’s just not taking investors’ money seriously.
The current stock and futures markets are actually facing similar problems. The futures market has recently undergone significant adjustments, but no matter what, it is unlikely that black colored oils, fats, legumes, coal, coke, and rubber will all fall together. When it used to rise excessively, isn’t it collective irrational behavior now when it falls? Where has the supply-demand relationship gone? Not accounting for cost and profit?
Not to mention the stock market, everyone has been trembling after the Spring Festival, but in recent days, they have suddenly become bolder and their holdings have surged, reaching their highest point since June 2015. There seem to be more good stocks, good concepts, and good themes all at once, fewer people talking about risks, and more people looking forward to new market trends. Then, the stock market gradually became a bit weak. Will there be an adjustment when everyone is unanimously bullish, or a sudden reversal when everyone is unanimously bearish?
The path of investment is destined to be lonely. The people who make money in the market are very few. Even though these few people later started a company and built a team, what really made a difference was to hire one or two core personnel. A team of hundreds of people, only a few can contribute. If you are thinking of finding an ally in your heart, it is destined that you are not the future winner.
So, in order to make a profit in investment, one must thoroughly study human nature and act against it. Not being an ordinary person, not doing ordinary things, there are not many people on every path, only then can you be a successful person.