Selasa, 15 Juli 2025

A trader's downfall...

Shield

AN OXFORD CLUB PUBLICATION

Loyal reader since October 2020

Liberty Through Wealth

EDITOR'S NOTE

Chief Income Strategist Marc Lichtenfeld's new presentation was a year in the making... and looks back at over 10 years of market data.

The subject, you ask? How everyday investors could pocket gains as high as 354% overnight by taking advantage of Wall Street's greed.

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- Nicole Labra, Senior Managing Editor

THE SHORTEST WAY TO A RICH LIFE

Emotions Can Be a Trader's Downfall

Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Marc Lichtenfeld

Have you ever taken a class where it felt like the professor opened up your brain like an empty Tupperware container and filled it with knowledge?

That's what happened to me when I took a graduate-level class with one of my mentors in technical analysis, Dr. Hank Pruden.

For those of you who are unfamiliar with the term "technical analysis," it refers to analyzing a market or an individual asset using charts.

I was expecting to learn about trend lines, bullish and bearish patterns, cycle analysis, etc., in this class. But instead, we dove deep into the psychology of the markets, trying to understand what motivates investors and traders to act the way they do.

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Today, there are many institutions that teach behavioral finance, but at the time, it was groundbreaking stuff.

One of the most important concepts is that investors' behaviors repeat time and time again. There are no guarantees, of course, and every situation will be a little different, but humans can be fairly predictable.

We typically fear the worst just before things get better... and we expect things will always be this good just before they get worse.

This course taught me a number of key ideas that I still use nearly three decades later. Here are a few of the most impactful ones.

Confirmation Bias

Confirmation bias occurs when you focus only on the information that confirms your beliefs. People do this with their political beliefs all the time, and the media plays into it by exclusively giving them information that aligns with their point of view.

In the markets, an investor may believe that a stock is a great buy because they see the company's products everywhere... which may cause them to ignore the fact that the stock has been in a downtrend all year. Despite the market signaling that things are not great for the company, the investor buys the stock anyway.

Overconfidence

I'd bet almost everyone reading this believes they're a better-than-average driver. In college, I had an argument with a friend about what a horrible driver he was. "How many cars have you totaled?" I asked. (The number was three in the previous four years.) "Yeah, but they were all somebody else's fault!" he exclaimed.

Enough said.

When things are going well in the markets, investors often confuse a bull market with their own genius and think they'll know when to get out. Of course, it doesn't work out that way.

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The Herd Effect

How many times have you been looking for a place to eat and walked past an empty restaurant to wait at a crowded one?

We've seen this time and again in investing, like when people piled into dot-com stocks, crypto, cannabis stocks, and meme stocks because that's what everyone else was doing.

Being aware of these concepts can help you question your own decision making and ensure that you're thinking critically about each buy and sell.

You can also use stock charts to test your opinion.

For example, just last month, Enphase Energy (Nasdaq: ENPH) fell off a cliff, dropping 24% in one day over concerns about the removal of clean-energy tax credits.

Keep in mind, this wasn't a sketchy startup with zero sales to its name. Enphase is a viable, well-established company. It made no sense that everyone was bailing on the stock.

Let's say you were on Reddit or some other message board reading about Enphase and all the reasons its stock was toast. One look at the stock chart would've told you that "the herd" was likely overreacting... because when the stock stopped falling, it was likely going to reverse quickly.

Sure enough, Enphase was up as much as 5.2% the next day and is now up more than 19% in less than a month.

The Herd Rushes Out... and Then Rushes Back In
 

Technical analysis is simply the visual representation of investors' emotions. The more aware you are of those emotions and behaviors and how to interpret them, the better a trader and investor you're going to be.

Good investing,

Marc

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