The Information Disadvantage of the Investing Public
https://www.jstor.org/stable/20696374?seq=2#page_scan_tab_contents
“The bull market operator really hopes to sell out near the extreme, to someone else. This someone else will have to suffer a financial injury, if the bull market operator’s appraisal has been correct. Obviously, this someone else will have to be a relatively unwary person, and such unwariness could logically be attributed only to “the public.” Thus, the bull market opera tor becomes the public’s enemy.” – Walter Gutman
These days, Wall Street is very automated. A sizeable proportion (maybe even a majority) of firms use quantitative methods, algorithms and the like, to determine what to buy or sell, and when. Even a few decades ago, investing was largely a matter of the personal judgement of the investor based on the information available to him; as such, the psychology of individual investors had an arguably greater effect on the fortunes of Wall Street firms than it does now. However, for the ordinary member of the public who invests not as a job, but as a hobby or for a side source of income, the game remains more or less the same as it has been before. As such, the collective behavior of the investing public continues to influence bull and bear markets, and the transitions between them; meanwhile, the collective behavior itself is influenced by the information available to the public.
There is less information available to the investing public about the current state of the market than there is to traders. When ordinary people invest in a stock, they do not know exactly how well the stock or the company is doing at the current moment; instead, they take their cues from broader trends, and from what other investors are doing. In particular, if some event prompts stock prices to rise, Wall Street traders are the first to take advantage of this jump, followed by the investors who closely keep tabs on the traders. As the information that “people are buying” propagates through the public, more and more people invest, hoping that the stock prices will continue to rise. This kind of cascade gives rise to a bull market, in which people invest under the assumptions that stock prices will keep rising.
However, all bull markets come to an end, and after stock prices peak, they go down. Of course, the ideal course of action for any investor is to sell their stocks while the market is at its peak, and thus make the greatest amount of money while avoiding the negative effects of the downturn. In this, the Wall Street traders again have a huge advantage in information, since they can predict best and react the most quickly to a change in the market. The investing public, meanwhile, still believes (because contrary information had not yet reached it) that it is in a bull market, and buys the stocks sold by Wall Street traders, anticipating that prices will go up. Instead, they are caught at a disadvantage holding stock while prices go down. The rush to sell stock before prices fall further then creates a bear market.
So what is an investor to do? The most reliable method to gain an advantage over everyone else is to increase access to information. The investor can try to obtain more direct information. Obtaining direct, recent, information is now easier than ever, due to stock-tracking apps and such. In fact, this new access has opened new possibilities for amateur investors, who can now feasibly use many of the same quantitative techniques used on Wall Street. However, one still needs time to process the information and draw conclusions. As such, there is a pressure to devote more and more time to keeping up with the state of the market. For most non-professional investors, there is a limit to how much time can be devoted to trading; as such, they stand no chance of eliminating the disadvantage they have compared to Wall Street traders and other investors with more time on their hands. Inevitably, the majority of those investors who try to ride the bull market will end up losing money when the market peaks. As such, the wisest course of action is to invest safely, and not get on the bull in the first place.