Lessons on the "Herd Mentality" and Timing

Back in December 1999 I, like everyone else, was involved in the stock market. I saw myself as such a smart guy that I thought I could quit my job and make money by sitting in front a computer screen trading stocks. I would simply outsmart all of the other people involved. My strategy was easy, get up in the morning, identify the stocks that were going up, buy them and then before the market closed, sell. It was too easy!

I thought I was above average. I also thought that reading books would quickly help me become smarter than the rest. I read as many as time permitted. Some of the books were:

1. Reminiscences of a Stock Operator
   
2. Trading for a Living: Psychology, Trading Tactics, Money Management
3. Beyond Greed and Fear
   

I enjoyed reading them. However, many of the things I read caused me concern and conflicted with my trading strategy. Statements like:

"A group of three or more ads touting the same opportunity on the same page of a major newspaper warns of a top."
- Trading for a Living, page 215

Not only did I see ads in the newspapers, but commercials, infomercials, radio and television news stories, it was everywhere. I reasoned with myself, I was not like all of the others. I could react quicker, therefore I would avoid getting hurt financially.

Little did I realize that I was just part of the trading herd. My trading strategy wasn't a true strategy, it was a five second to five minute technical analysis before making the trade. What I was forgetting was that I was just an ordinary guy. I wasn't a professional but I wanted to be. Most everyone has this problem, even a large percentage of the professionals get caught up in this "Herd Mentality."

After learning how to read stock charts, I began to see tops in the stock market. It looked to me as if the market was going to go down. But the market didn't go down. For weeks money was still being won and lost. I saw stocks climb to ridiculous prices and so attempted to short the stock (borrow someone else's stock, through the broker, to sell with the intent to buy back the stock at a later time and lower price, pocketing the difference.) I knew that the stock was grossly overpriced, however the price would keep climbing and I would be force to buy back at a higher price and lose money in the process.

For example, I sold Rambus short at $209 dollars, throughout the day the stock price fell to $189. I felt good about it and went to sleep feeling good, I had studied and felt that it was way overpriced (what wasn't?) The next morning, a broker covering the stock came out just before the opening bell and said, "we reiterate a strong buy." Ten minutes later I felt lucky to buy back at $217 dollars. The current price of Rambus is $19 dollars and change. I was right but I was too early and my correctness depended on timing the trade correctly. Too hard for just an ordinary guy with less than $200,000 dollars to trade.

Needless to say, I learned two very important lessons:

1. Ordinary people get hurt financially when doing things simply because everyone else is and mistakenly think they can't afford to miss the opportunity.
2. Even though I might be right when making an investment, if timing was important in order to make money, I could still lose by being forced out. I needed to invest in things where timing wasn't involved.