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The Market as a Mood Disorder-Personal Experiences from "The Street"
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In the early part of 1999, technology and IPO stocks were flying high and investor speculation was out of control. Prices were increasing at a fast and steady rate, giving rise to new profit opportunities and attracting further investment and income increases. Everyone was making money, just for going along with the ride. However, I noticed that many transactional brokers were exhibiting symptoms of hypomania, that manifested themselves as excessive phone calls to future investors (over 600 per day), euphoric mood, a decreased need for sleep, an increase in risk appetite, grandiose thoughts about themselves and a sense of invulnerability, and excessive spending. It is probably no coincidence that our markets did so well at a time when account executives went into each call with high levels of confidence in the products that they were selling. Their energy and confidence sparked investors' interest and a desire to go against their better judgment to invest in highly overvalued stocks. The excessive phone contacts that were made during that time also explained the manic state of our markets in early 1999.
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Everyone was making money, just for going along with the ride.
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The law of averages would state that the more potential investors a broker would call on a given day, the more "closes" or new accounts he or she would obtain. Surprisingly, some brokers even became depressed at this time, as their perfectionistic personalities led them to compare themselves to the top earners of each firm. If they were bringing in $200,000, they became angered that they weren't making $300,000. They relentlessly called investors to keep up with the "top dogs" of their firms. The number one distinction between a transactional broker and a casino gambler appears to be that, the gambler can walk away with his winnings for the day and enjoy it. A broker must compare his earnings to others around him and cannot just walk away from his next trade. Thus, it appears that the hypomanic symptoms of these transactional brokers drove the market share prices higher, but also set the economy up for an abrupt and debilitating market recession because of the irrational risks that were taken without forethought or a solid hedging discipline.
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Investors became more mistrustful of the economy and the brokers who at one time were Gods, but now looked more like swindlers.
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Only one year later, after the dust had settled and the investors' wallets were drained, it became obvious that the brokers' confidence in their own abilities had taken a hit as well. The number of phone calls to investors dropped to approximately 300 per day in the transactional world of the brokerage industry, and investors became more mistrustful of the economy and the brokers who at one time were Gods, but now looked more like swindlers. No longer did brokers go into work with the swagger that they owned one year prior. Many reported having trouble getting out of bed in the morning because of intrusive thoughts that they were experiencing such as "what's the point?" In my interviews with brokers, they noted that it was very difficult to walk to work and motivate themselves to make "cold calls" after the bell. Their belief system was that the investors "didn't want to be bothered" and on some level, the brokers became tired of repeated rejection over the phone. In essence, their negativistic thoughts and predictions about the outcomes for phone calls to future investors led them to display self-defeating behaviors; not making calls to investors. With the number of "cold calls" cut in half since the early portion of 1999, it is not surprising that the market indexes plummeted. Investors were no longer excited, because the brokers could not muster the strength or confidence in themselves or their product anymore. The "euphoria" of early 1999 was met with the cruel reality that stocks were overpriced and companies would not be able to meet their liabilities. Thus, the markets became depressed. Interestingly, brokers could no longer deal with the reality that there was no certainty in the market's course, and in conjunction with their decrease in productivity, a psychological depression ensued, hampering their ability to "work" the investors, driving the market shares up.
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The number one distinction between a transactional broker and a casino gambler appears to be that, the gambler can walk away with his winnings for the day and enjoy it. A broker must compare his earnings to others around him and cannot just walk away from his next trade.
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The lesson to learn from this is that there is a reciprocal relationship between brokers' moods and the highs and lows of our market share prices. If brokers can find a happy medium between euphoria and clinical levels of depression, our markets might be healthier. In our new economy, the only companies that the public will invest in, have had proven track records and are legitimate contenders. No longer will investors "believe in the get rich quick dream," that they were led into during the "bubble." Thus, account executives need to adhere to a disciplined approach to investing and check their moods at the door in the morning. In our next installment, I will discuss some ways to use "bullish thinking" to keep your thoughts and moods at stable, reality based levels.
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