The field now known as behavioral finance was pioneered in the early 20th century by writers like George C. Selden, who in 1912 published "Psychology of the Stock Market" with the then-novel notion that "the movements of prices on the exchanges are dependent to a very considerable degree on the mental attitude of the investing and trading public."
Even now as sentiment indicators the VIX -- which measures expected volatility and is also known as the "fear index" -- are commonly integrated into our research and trading routines, the basic foibles Selden outlined still plague investors today. Markets change but human nature doesn't. In Selden's words, "human impulses lead to speculative disasters."
One of the most enduring misconceptions in the markets is the notion of "they" -- that a secret cabal of speculators is somehow able to manipulate and move the market at whim and trounce small-fry investors. In Selden's time, it was the "Standard Oil crowd" or "J.P. Morgan interests" that were routinely blamed or credited; a similar dishonor is now bestowed on firms like Goldman Sachs (GS),
The problem with imagining that "they" control prices is that is falsely distracts us into conjuring up why a market is moving rather than focusing on what matters: how it's moving. Because while the three rules of real estate are "location, location, location," the stock market equivalent for technicians is "price, price, price." Trying to anticipate the actions of a non-existent group of uber-investors as a means of divining market moves is pointless: Like a dog forever chasing its tail, no answer can ever be reached.
Even worse, such an attitude falsely absolves us of the responsibility for our positions by providing a convenient scapegoat to explain away our own market missteps. Losses stemming from incorrect position size or risk discipline can be blamed on high-frequency traders or ruthless New York banks instead of our own poor decisions. (Of course, when we make money, it's entirely the result of own foresight).
Stocks can either rise or fall. And at any given time, there are investors on both sides of the market hoping to influence prices to move their way. And as we wrote a few years back, even if a large speculator or group of speculators conspired to push the market in one direction, the impact would be abortive and short-lived.
In reality, "they" who supposedly control the markets are all of us -- investors ranging from spur-of-the-moment traders to long-term holders which unintentionally coordinate to produce a stock's price. They are, as Selden puts it, the ultimate consumers of securities. For "it is to 'Them' that everybody else is planning, sooner or later, directly or indirectly, to sell his stocks," he writes. Investors are best served by simply monitoring a stock's price, and making sure their own positions reflect the reality of the markets as they are -- not as one imagines "they" will push them.—Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC