The psychological analysis The psychological analysis (PA) nThe human element is essential in the process of investment. nInvestment decision is na subjective decision and ndetermined by human emotions. nThe existence of psychological aspects in the short-time investment was confirmed for several times. n nCompared with fundamental and psychological analysis PA has only a margin importace in an asset analysis. nFundamental analysis focuses on qIntrinsic value qFactors that determine this value n Technical analysis qAnalysis of past and current capital market trend to derive future development nThe interest of technical and fundamental analyzers is focused on securities. nThe interest of psychological analyzers is focused on behavior of investors on the capital market. n The psychological analysis nThe subject of PA research is human being, nhuman factor in the process of investment nand impulses that evoke particular investment actions. nThe basic idea qMass psychology by Gustav Le Bon qAccording to the mass psychology is possible to determine successful investors behavior qAt the most of the time successful behavior is reverse to the behavior of the mass investors LE BON MASS PSYCHOLOGY nThe initial point of the Le Bon mass psychology qAnalysis of the collective soul nThis collective soul establishes in the place nwhere is some group of people nand where an particular event occurs nPeople do not deal as a individuals but deal as a mass. nPersonal characteristics of individuals are put down and replace by collective way of thinking. nIn mass psychology the dominant role is played by instincts in the short time period. qThe rational level of the mass is low, lower than is rational level of particular individuals in mass. LE BON MASS PSYCHOLOGY nGeneral characteristics of mass qVehement variability of the spirit and an sensibility nInvestors are inspired very easy for every attractive idea. It is very easy to convince them about attractively of particular investment. nWave of optimism/pessimism control whole mass. nThe mind/rationality is put down. nDominant role is played by feelings. qFrivolity of mass nMass is fed by stories about easy, quick, above-average profit. nMass is not able to differ what is illusion and what is reality. nMass is not able to take into account what is probable, possible and impossible. LE BON MASS PSYCHOLOGY nExaggerate and simplified feelings of a mass q Feelings of mass tend to develop in extremes. qMass nUncritical love, or nAbsolutely reject nIntolerance and authoritativeness of mass qMass hates criticism of mass idea and it is aiming to advocate only own idea. qThere is only one way why mass leaves this idea, only if the mass gets new, more promoting idea that takes turn last idea. LE BON MASS PSYCHOLOGY nMoral of mass qMoral level of mass is very low. Moral and ethics values are not adored by mass qMass does not know qmoral and ethical responsibility, qdoes not know misdoubt, qdoes not analyses for and against qdoes not take into account the possibility of punishment. Kostolany investment psychology „In a gold rush, do not invest in gold diggers but in shovels “ nRepresented of psychological analyzers nOnly for short time period nMid-term period nInterest rates, liquidity nLong time period nFundamental aspects nInitial point qDividing of all capital market subjects in two categories nSpeculates: 10 % of participants nPlayers: 90 % of participants qParticular continuity with Le Bon mass psychology because nThe majority of investment – category of players represents the mass with characteristics and behavior. qSpeculates are strong personalities and they are immune against the mass psychology. qIn long time period speculates are more successful than players. n Kostolany investment psychology nSpeculates – firm hands qCharacteristic of speculates n4 G – idea, patience, money, luck qGedenken, Gedult, Geld, Glück. nThey are able to resist of the mass psychology nThey decision is based on relevant factors nIn main trend in capital market q2/3 of trend against the main trend q1/3 of trend with harmony of main trend nAccording to investor experience there is very difficult to decide qWhen to deal against main trend activity qHow long to stay in these activities nPresumption for this successful behavior is in 4Gs n The main problem of Kostolany theory application is that it is based on qNative ability qLuck and accident q Kostolany investment psychology nPlayers – shaking hands qThe majority of investors qThe activities in capital market are controlled by an afford to nGet high revenues in the short time period qThey are not able to analyze situation in the market nThey copy behavior of other subjects nBuy if the others bought nSell if the others sold qBut they behavior is delayed and thus they buy in the case of high prices or sell in the case of low prices Kostolany investment psychology nActivities of players are danger for a capital market because qThey behavior is unpredictable qThey behavior is not explained logically nKostolany: qSpeculates are happy if won and if the winning was based on calculation that was despite of the others expectation correct. The fact that their calculation was correct is for them more satisfy that the money they earned. But players are different. They boasted about they winning but they were silent in the case of loss. Kostolany investment psychology nDividing of market in players and speculates with their typical framework of behavior and actions has one important reason for analyzer – psychologist qHe is able to find out which group of investors hold the most of the securities in particular time. It means he is able to investigate technical composition of the market. qAccording to situation in the market there is possible to derive probable tendencies in the future. qIt the most of the securities is holt by speculates it is known as a oversold. qIt the most of the securities is holt by players it is known as a overbought. Kostolany investment psychology nThe technical composition of the market is based on qAnalysis of stock exchange rates qAnalysis of the volume of trade nIf stock prices and volume of trade are rising qMovement of securities form speculates to players because only players buy in the case of rising security rates qMarket becomes overbought qMarket is high risk and danger because the majority of securities are in the hand of subjects that deal emotionally under mass psychology q n Kostolany investment psychology nIf security exchange rates is declining and volume of trade are rising qMovement of securities from players to speculates because speculate are buying in the case of low security exchange rate qThe proof of security movement is rising level of trade volume qThis market is called oversold q Kostolany investment psychology nIf exchange rates are declining and volume of trade is declining as well qIt is an evidence that speculates despite of declining stock exchange rates did not start to buy qIn this situation these is expected negative development in capital market qSpeculates expect sharp decline in the future qFrom bull to bear market Kostolany investment psychology nIf security exchange rates are rising and volume of trade is declining or stagnate qTwo possible scenarios nPlayers are controlled by pessimism or players do not get any positive information that starts they activities nOr player are illiquid they have no money to they investment activities qIf we know in which hands there is the majority of securities or from which hands are securities moving it is possible to derive in which phases of cycle is stock exchange. Test of speculates Kostolany investment psychology nNumber of A: 11-14 nYou are focused on safeness. nIf you earn money you care only how to stick them together. nYour investment strategy must be focused on precise estimations of revenues. nYou should hold your money in bank account, maybe you can choose time deposits or short-term bonds. Kostolany investment psychology nNumber of B: 11 – 14 nYou are typical a speculate investor. nYou do not prefer long-term investments. nYou are interested in stock exchange, you are looking for new information and react them in the moment. nYou are waiting for the right moment. nYou are not investor you are speculates. nBut if you do not have a time for your investments you invest your money in saving account. n Kostolany investment psychology nNumber of A:10, or nNumber of B: 10 nYou like an adventure but you also need some risk buffer. nYour risk must be exactly calculated. nInvestment products according to your profile qmiddle-terms bonds qblue chips, or qgovernment securities Epstein and Garfield Investment Psychology nIra Epstein nDavid Garfield nAt the end of 20th century with questionnaire for 140 retail and 175 professional investors nAccording to results 6 kinds of investor profiles qVery important is the role of the money in investor life. qFor every investor is important to find out its personal, true relation to money to be able protect yourself against money. n Epstein and Garfield Investment Psychology nMasked investor: Money makes me proud and the others will be proud to me nDepressed investor: Money makes me happy nRevenge investor: With money I can knock down those that knocked down me nFussy investor: Money avoids breakup of my personality nParanoid investor: If I have money I can not be hurt nConflicted investor: Money makes me the winner but what happened if I lose? Theory of speculative bubble Theory of speculative bubble nPrices of stocks, real estates or commodities tend to exaggerate growth without fundamental explanation for time and again. nThis strong and quick growth of a price is suddenly stopped and replaced by quick and strong decline. nAccording to financial market theory these phenomenon occurs if q market value is significantly different from intrinsic value nIt situation is called a speculative bubble. Theory of speculative bubble nSpeculative bubble definition qQuick growth of asset price nInitial growth is powered by expected future growth that is attractive for new buyers especially speculators that are attracted by quick profit. nStrong decline of assets price very often leads to financial crisis. n n Three explanations of financial crisis nMass psychology nTheory of noise traders nIneffective market Three explanations of financial crisis nMass Psychology qSpeculative bubble is started by some important event qThis event is over- or under- valuate by investors that reacts exaggeratedly. qInvestors start to mass sale or mass buy and thus push prices more down or up. qBubble growths till investors believe in asset investment. Three explanations of financial crisis nNoise traders qTheory according this fluctuation of security prices from intrinsic value is evoked by existence of two kinds of investors. q Sophisticate investors nAccession to information nSkills and knowledge to sort out information in qRelevant qIrrelevant nInvestors are know as smart money Three explanations of financial crisis qNoise traders nLack of relevant information nLack of investment skills and knowledge nActivities of noise traders divert prices of assets from their intrinsic value. Tulip Madness nOne of the most known and historically oldest speculative bubble in commodity market. nTulips were unknown commodities till 1554 when were imported in Holland from South-East. nDuring 100 years became fashion article. nTulip prices were pushed up by speculation achieved significantly high level. nPrices of tulips grew from 1634. nAs suddenly as tulip prices grow they collapsed in February 1637. nOptimistic expectation of investors about price growth disappeared and speculation bubble burst out. n Tulip Madness nValue of all forward contracts for sale or buy of tulips were abandoned and investors lost their money. nIn summer 1637 tulips traded in prices of 5-10 % of 1637 prices in January. 800px-Flora's_Malle-wagen_van_Hendrik_Pot_1640 An allegory of tulip mania by Hendrik Gerritsz Pot, circa 1640. 800px-Tulip_price_index1 The South Sea bubble nSouth Sea Bubble is the oldest bubble that came up and burst out in stock market nEngland, 1720 nInitial impulse was established South Sea Company (SSC) to get financial resources for settlements debts from England-Spain war. nLater SSC overtook part of the British budget debt. n The South Sea bubble nInterest of investors about subscribing for SSC shares was huge. nShareholders capital of SSC grew about 1,7 million pounds since 1719. nPart of capital were used for debt settlement in exchange for license for trading with West and East cost of South America, Spain part of India and Spain colonies in America. n The South Sea bubble nEnthusiasm and faith of investors grew and asset demand grew as well. nPrice of one stocks grew about hundreds of pounds. nHigh profit of first investors in SSC attracted another investors. nSpeculation pushed stock prices up at 1050 pounds and 1100 pounds from 126 pounds. nIn level 1100 pounds per stock psychological barrier was reached and bubble burst out. The South Sea bubble nFrom price 1100 pounds per share number and interest of investors started decline. nFrom September 1720 prices of SSC declined from 1000 to 175 pounds. And bubble burst out. South_Sea_Bubble "South Sea Bubble", by Edward Matthew Ward Dot-com bubble nFor development of U.S. stock market and next world stocks market was typical nGrowth of the U.S. economy: 3,2 % qStrong growth of IT companies stocks since the end of the 1990’s nThe value of Nasdaq Composite index reached the value of 5000 point at the end of 1999. nAt the end of 1999 first consideration about overvaluation of the market. nPeak of index 5049 points was reached in April 2000. qAnnual reports of IT companies shows bed economic results in April 2000. nWhole IT sector was suffered by skepticisms that spread in other sectors and branches. nDot-com bubble burst out. n NASDAQ Composite 1973 - 2007 How many dollars are investors will to pay for one net unit of profit. Market Year P/E ratio NYSE 1929 21 NYSE 1969 18 NASDAQ 2000 200 Explanation of dot-com bubble nMass behavior of investors nNew growing IT sector attracted investors and they were able to gain high profit. nDot-com bubble was growing till companies satisfied investor by their economic results. qProfit form IT companies was extreme compared with other sectors. nDot com bubble existed till company results satisfied optimistic expectation of investors. q n n Explanation of dot-com bubble nIn the spring 2000 dot-com bubble burst out. nDoc-com stock demand decline and the sale of dot-com stock started. Thank you for attention