The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails

A Context

Of course, it is incredibly difficult to move opposite the crowd. We are social creatures. We find psychological sustenance in friendship and in community. Few of us are naturally wired to ever do the opposite of others. This handicaps people when they invest.

Wall Street specializes in crowd psychology. Wall Street is designed to move inventory like used cars. And as they say in the used-car business: There is an ass for every seat. On Wall Street, everything is for sale, or lease—even the buy-and-hold shares that you keep with the intention of leaving to your children and grandchildren. Your brokerage firm routinely lends those shares to “short sellers,” who sell them because they think they can buy them back at a lower price and pocket the difference.

You should not expect analysts to tell you when to sell your stocks and take profits. Bank analysts rarely want to anger executives of the corporations they cover; that could cost their firms lucrative investment banking business. Besides, almost all analysts depend on corporate executives for access. Anger the executives, and you have no access. Rarer still is the bank that assigns sell ratings to stocks. Almost all stocks, all the time, are buys.

Of course, the banks know this is not always true. They worry about how their money is used. They have risk managers who monitor the investments of all of their traders. The computer systems that process these trades are all programmed to prevent major losses. This highlights ...