A friend of mine recently asked if I had read a book called Psychology of the Stock Market. Given the subject matter, I was quite surprised that I hadn’t come across it. Even more surprising is that it was first published over 100 years ago. So, how do George Charles Selden’s thoughts on investor and market behaviour from 1912 compare with today? Has much changed?

Let’s look at some highlights:

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“The market is always a contest between investors and speculators.”

Selden argues that there are two types of market participants. Investors – who are focused on the fundamental attributes of a security or asset, and speculators – who are concerned only with the direction of the price.

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“The speculator cares nothing about interest return…He would as soon buy at the top of a big rise as at any other time.”

The idea that large swathes of investors have no real concern about the underlying value of a security is similar to something I wrote about valuation and price in 2022. He just got there a little earlier than me.

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“However firm may be his bearish convictions, his nervous system eventually gives out under this continual pounding, and he covers everything…with a sigh of relief that his losses are no greater.”

Selden writes of a short seller who – despite retaining a stridently negative opinion – capitulates because of the pain of being the wrong side of a trade. Evoking not only loss aversion, but the emotional strain of being wrong.

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“It is hard for the average man to oppose what appears to be the general drift of public opinion. In the stock market it is perhaps harder than elsewhere.”

We are inescapably drawn towards the behaviour of the crowd. Taking and maintaining contrary views can be exacting and exhausting.  

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“the average man is an optimist regarding his own enterprises and a pessimist regarding those of others…he comes habitually to expect everyone else will be wrong, but is, as a rule, confident that his own analysis of the situation will prove correct.”

This description of overconfidence from Selden still resonates today. The odds and evidence are against everyone else successfully picking stocks, timing the market or making economic predictions – but, of course, I can do it.

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“If you are long or short the market you are not an unprejudiced judge, and you will be greatly tempted to put such an interpretation upon current events as will coincide with your preconceived opinion.”

Confirmation bias remains as strong now as it was back in 1912.

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“When the market looks weakest, when the news is at the worst, when bearish prognostications are most general, is the time to buy, as every school boy knows; but…it is almost impossible for him to get up the courage to plunge in and buy.”

Here Selden describes the difference between our behaviour in a hot and cold state. In our cool, calculating moments, it is easy to plan what we will do when markets are in turmoil; yet when that moment arrives our emotions will take hold with fear and anxiety overwhelming us. Selden was unknowingly advocating systematising future investment decision.

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“It is a sort of automatic assumption of the human mind that present conditions will continue”

Extrapolation remains one of the most damaging investor behaviours.

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“Some events cannot be discounted, even by the supposed omniscience of the great banking interests.”

Selden is writing of our inability to anticipate or price certain risks. Although we might think of this as similar to black swans, he goes on to mention earthquakes – so this is more about ‘known unknown’ tail risks, than events we have not even considered.  

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“Even the clearest mind and the most accurate information can result only in a balancing of probabilities, with the scale perhaps inclined to a greater or less degree in one direction or the other.”  

Selden alights on two vital topics for investors here. The need to think in probabilistic terms and the requirement to temper our confidence. Both are essential for dealing with such a complex system as financial markets. Humility is critical.

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“The professional trader…eventually comes to base all his operations for short turns in the market not on the facts but what he believes the facts will cause others to do.”

Selden pre-empts the Keynesian beauty contest here and describes the behaviour of many investors then and now. Decisions are not made based on new information, but how it is perceived other investors will respond to that new information.

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“Both the panic and the boom are eminently psychological phenomena.”

It is at the extremes of market behaviour that investor psychology is most apparent and difficult to resist.

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“The “long pull” investor buying outright for cash and holding for a liberal profit, need only consider this matter enough to guard against becoming confused by the vagaries of public sentiment or by his own inverted reasoning.”

By “long pull” Selden is referring to long-term, fundamentally driven investor. To benefit from the long-term benefits of stock market investing one must ignore the fickle and forceful shifts in investor opinion and resist our own behavioural foibles. Easier said than done!   
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“Another quality that makes for success in nearly every line of business is enthusiasm. For this you have absolutely no use in the stock market… Any emotion – enthusiasm, fear, anger, depression – will only cloud the intellect.”

It is difficult to overstate the extent to which our investment judgments are driven by how they make us feel. A good rule of thumb is – the stronger our emotion, the worse the decision.

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“Sometimes it may become necessary to close all commitments and remain out of the market for a few days”

Selden is writing from a trader’s perspective here, so most of us can turn his “days” into weeks, months and years. The less we check our portfolios and watch financial news, the better our outcomes are likely to be.

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Although Selden doesn’t use the same terms, it is impossible not to recognise the behaviours he describes. I am often asked whether an improved awareness of the pitfalls of investor psychology has improved behaviour. Unfortunately, I don’t think it has. Rather the ease of which we can trade, monitor our portfolios, and receive new information (noise) has made things worse. Selden’s words from 1912 are just as relevant today, if not more so. 

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You can get a copy of Psychology of the Stock Market here.

I am not sure if my book – The Intelligent Fund Investor – will still be around in 100 years, so in case it isn’t you can get a copy now – here (UK) or here (US).

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