Professor Elam

Saturday April 14, 2017

An alert student wrote this about Bob Prechter's Chapter One

I've heard it said that when the economy is doing bad that's the best time to buy stocks and if that's happening during a bad season then wouldn't it look like the market is recovering and doing well during bad economic times if most people are buying?

Yes that is true, but the problem is that this is NOT what people do. People sell in bad times and buy in the best of times buoyed by positive social mood. Right now consumer confidence

is high, the highest in yeas, and so margin debt, money borrowed to buy stocks, is high as well.. But during the 2008-9 crisis, people sold stocks and did not buy.

This is the herding instinct. People can learn not to do this but most never will.

We are stil controlled by our innate fear of danger no doubt going back to hunting wild animals on foot, recall there were no horses in the US until the Spanish brought them

We learned to run away from the charging buffalo who represented danger.  And so it is not natural to run toward the falling stock market when everyone is losing money. 3,000 of the 5,000 NASD points gained from 1982-2000 occurred in the LAST 18 MONTHS OF THE MARKET RISE. Only then after sixteen years of advance did people feel comfortable buying.  They bought just in time for experience the dot.com crash.