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Brandon Garretson started dabbling in stocks a few years ago as the market began to rally. He got more serious last year after joining an online-trading forum. Now, the 31-year-old salesman of equipment to chemical plants makes about two trades an hour via his TD Ameritrade account.

"I love it," said the Baton Rouge, La., resident. "You look over charts and come up with ideas for the next day. There's really not a better feeling," he said. He says he is considering quitting his job to trade full time.

From the article "Small Investors Jump Back In The Trading Game", WSJ 2/21/2014

"Don't confuse brains with a bull market."

From The Art Of Contrary Thinking, Humphrey Neill, The Vermont Ruminator

I don't know Brandon and for all I know he is the greatest trader to come along since Jesse Livermore but two trades an hour??!!! I realize that trading is not investing-- but two trades an hour doesn't even, at least in my book, qualify as trading. It is gambling pure and simple and Mr. Garretson would be better off jetting to Vegas to place his bets. At least he would know what he was getting into and if he bets enough he can probably get "free" drinks and lodging to boot. Wall Street, last I checked, had no comp policy. The market does frequently offer a very expensive education for anyone still confused about its bi-directional nature. I do hope that Brandon gets his before he quits his real job.

If you had told me in 2009 that in a few short years everyone would forget about the dot com bubble and the real estate bubble and go back to doing the things that got them into so much trouble, I would have laughed in your face. I assumed, wrongly as it turns out, that the pain of those two episodes would linger for at least a decade if not an entire generation. To some degree that has been borne out by the millenial generation's investing habits. As a group they hold over half their assets in cash and only about 30% in stocks. These young investors watched their parents get blindsided by Pets.com and then the sub-prime debacle and they learned. Or at least some of them did.

What worries and confounds me more are their older and presumably wiser parents. Another investor mentioned in the WSJ article is a retired 63 year IT professional who admits to losing half her portfolio in the dot com bust but is now back to trading. She has made over 40 trades already this year which is even more frenetic than the average of 10 trades/month she did last year. She says she makes a lot of trades because she's trying "to get a feel for the market". Maybe she should invest in a mood ring.

What most of these wannabe traders are experiencing is what is known as attribution bias. Brandon believes that his winning trades are a result of his skill at trading stocks when the reality is that his success is likely more attributable to luck - the luck of trading in a market that is making regular new highs. In Humphrey Neill's words, he is confusing brains with a bull market. There are any number of other biases that might be affecting his behavior now - recency bias come to mind - and a whole slew of others that will affect him when the bubble finally bursts. One thing he might want to read up on is how the pain from losses, or even the fear of them, is much greater than the pleasure derived from gains. If he doesn't have time because he's checking quotes on his phone or doing another trade, the market will educate him on that in due course.

I know it is hard to recognize a bubble in real time and maybe I'm reading too much into the anecdotal evidence (although there is plenty of data as well). Janet Yellen, whose job it is to recognize such things, said just last week that she sees little signs of excess.

"We are watching very carefully for the development of any such excesses. We are very focused on not allowing such a thing to happen again … While there might be a few areas where I have concerns, such as deteriorating underwriting standards in leveraged lending, farmland prices, a few things, I don't see those excesses having developed at this point.

"With respect to housing prices, they have rebounded significantly, but remain not back to their peak levels by any means. And price-rent ratios in housing certainly remain in normal ranges. So I don't think we have promoted excesses, certainly not at this stage."

It seems to me that the key word in that passage above is…."again". It reminds me of the likely apocryphal bumper sticker: Lord, give me just one more bubble and I promise not to screw this one up. It is certainly possible that I am exhibiting my own human biases when I see bubble signs all around me, but when unprofitable companies are leading the market and the biotech index goes vertical for a 35% gain in a matter of weeks, well, I can't help but notice.

Just last week we got a perfect exhibition of bubble behavior when Tesla (NASDAQ:TSLA) shot up 18% in one day based on nothing more than the navel gazing of a Morgan Stanley analyst. Adam Jonas raised his price target for Tesla to $320/share based on his projections of Tesla leading the world to a "utopian society" by 2028 and disrupting not only the auto industry but the electric utility industry on the side. Yes, the phrase "utopian society" was actually in the report.

To really get a feel for the bubbleness of that report, one only had to wait until the next day when Tesla announced an offering of convertible bonds with none other than Morgan Stanley as one of the lead underwriters. I'm sure the timing of Mr. Jonas' report was purely coincidental and had nothing whatsoever to do with his employer's underwriting fees. If that doesn't remind you of the late 90s, you either weren't alive or you are experiencing the early stages of Alzheimer's.

Further proof of bubbleliciousness? Tesla stock went up again on the day they announced the convertible offering. As a public service I'd just like to point out that "convertible" means that the bonds could one day be converted into more Tesla stock. If you're wondering how that could possibly be positive for existing shareholders, you aren't alone, but I guess when you are leading the world to a utopian society such things as a little dilution really aren't all that important.

Other signs of irrational behavior? Maybe it's time to talk about Bitcoin. Last week the main exchange for Bitcoins discovered that almost $500 million of the things had gone missing and just like that Mt. Gox was bankrupt. Personally, I don't need to read past the name of the company to understand that the whole thing might just well be a giant joke aimed squarely at the apocalypse now crowd, but for some reason others didn't seem to have a problem doing business with a company that started life as a trading card exchange for a game called Magic: The Gathering. Note to the FOMC: when people are willing, able and anxious to exchange billions of dollars for digital versions of an erstaz currency produced by hackers that is traded on an exchange with a name that sounds like it came right out of Dr. Seuss, you might have a credibility problem.

I don't know when the fever of this latest example of human folly will break. I've seen a number of market commentators remark recently that these things are only broken by tighter monetary policy. Since everyone seems to know that, I'll just venture the opinion that this latest episode of extraordinary popular delusions will end long before Janet Yellen figures it out. She says she can't see excesses right now and I'm sure she's telling the truth, but as Upton Sinclair said:

It is difficult to get a (wo)man to understand something when his (her) salary depends upon his (her) not understanding it.

I'll end this with a quote from Charles Mackay who wrote the book from which the title of this post is borrowed:

Money, again, has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper… Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.

When will we finally come to our senses?

Disclosure: No positions

Source: Extraordinary Popular Delusions