By Robert Prechter,
Nov 4, 2005

Has the house down the road from yours just sold for a package longer than you envisioned houses in your area might sell for? You may find yourself scratching your head at the amazing truth that some folks will pay greater than what a house -- or a inventory -- might be worth.

Bob Prechter wrote concerning the optimistic investor plogy that posits that prices will go high in his book, At the Crest of the Tidal Wave. He points out that when he entered the stock market business the investor was very sophistied. Why? 'Because anyone who was in the game following the 1968-1974 bear market either knew something about markets beforehand or had learned a lot consequently.' Bob claims that many investors today are caught up in a financial mania and, as with any mania, it's not always the men and women that are doing all the buying. Rather, it men and women who do not actually have the experience to do well in the markets, but that really do have the confidence that all will turn out nicely. Here's an excerpt from his novel that clarifies the issue.

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Manifestations of Investor Plogy, Excerpt from At the Crest of the Tidal Wave (2000), p.179-180

Gimme that bag!

I saw two Joseph Granville'reveals' in the late 1970s and early 1980s when this investment-letter writer was in his heyday. Granville enjoyed explaining that when buyers no more politely ask,'Please sell me your inventory,' but instead grab your collar and scream,'Gimme that bag! ,' do not contend with them,'Just give it to'em!' These'bagholders' are not just dumb, but he was saying, they demanding and are coarse so that they get what they deserve. The general public is crying,'Gimme that luggage!' To every possible seller of questionable newspaper, such as junk bonds, new issues, low-priced inventory capital, and re-packaged mortgage and consumer debt, things that will never cross my mind like a serious investment or possibly a solid speculation (except for a few professionals that know the sport ). Gentlemen all, the sellers, have politely complied.

Who is to blame?

The idea, though, that the public is entirely to blame because of its mindset doesn't wash. These are not people who choose to go to a casino because they believe in luck. The bear market may give them what they deserve for not having taught themselves some thing about investing before attempting it, perhaps, but in a different way, they have justifiably relied upon people they've been told are experts, the media pick-stocks-and-forget-market-trends monetary heroes, who have told them that the stock market is perfectly secure, that anyone not invested in shares is a fool. Those people are more to blame for the public's mindset than the public .

Irrespective of who's responsible, the general public will be in a fury when the house of cards fall. To amateurs, an uptrend is normal and a downtrend is an outrage, so that they won't tolerate losses.

Angry and angrier

In 1994, USA Today reported some investors' perturbation that they had lost a percentage or two of their money, but took the measure of assuring viewers that there were just four sensible courses of action: (1) Do nothing, (2) keep buying, (3) diversify to more funds, such as overseas funds, and (4) adjust your asset alloion. Out of four choices, not one was'get out of shares .'

The professionals and press commentators who have been ering into the public's whims, thus assuring that they'll continue to have no idea what they're doing, will soon have to survive a far younger disposition. When their resources are down 40% or 80%, angry will these people be? Since the naiveté of the investor is at an all-time large, the anger that the people will feel at the bottom of the bear market will hit an all-time large. It should recall where to direct its anger, when the people becomes enraged at its declines in years.