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The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails by Steven M. Sears

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Exile on Wall Street

Many seasoned investors view the public as a reliable indicator of what not to do. “The masses are asses,” one strategist said.

“The stock market is where smart people think of ways to take money from dumb people,” a trader said.

“The majority must lose for the minority to win,” a trader said.

“The stock market is a field of dreams,” another strategist said.

“Losers always come back to Vegas,” an options market maker said.

Those are harsh assessments, but they are backed by experience. The irrational crowd is a mainstay in financial history. The development of organized, financial markets helps magnetize the mob. The stock exchanges provide the architecture to support the mob’s scope. Mass media increases the mob’s velocity and ensures that everyone knows how much money can be made without much mention of how much could be lost. As Bernard Baruch noted in 1932:

All economic movements, by their very nature, are motivated by crowd psychology. Graphs and business ratios are, of course, indispensable in our groping efforts to find dependable rules to guide us in our present world of alarms. Yet, I never see a brilliant economic thesis expounding, as though they were geometrical theorems, the mathematics of price movements, that I do not recall Schiller’s dictum: “anyone taken as an individual is tolerably sensible and reasonable—as a member of a crowd, he at once becomes a blockhead.”11

This has been proven for hundreds of years. The first financial bubble arguably ...

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