Stock Analysis
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Part 1: The "Why"
The Biology of Bad Decisions
You are not "stupid" for buying high and selling low. You are biologically wired to do it. Your brain evolved to survive on the savannah, not to trade stocks.
1. The "Buy High" Trap (Dopamine Loop)
The Scenario: The market is soaring. Your friends are making money. You see green numbers everywhere.
The Neuroscience: Your brain releases Dopamine, the "reward anticipation" chemical. It screams, "Do this action to get a reward!"
The Result: You feel "FOMO" (Fear Of Missing Out). This is not just an emotion; it is a chemical compulsion. You buy at the top because your brain perceives safety in numbers (Herd Mentality).
2. The "Sell Low" Trap (Cortisol Hijack)
The Scenario: The market crashes. Red numbers. News anchors are shouting "Recession!"
The Neuroscience: Your amygdala (fear center) activates, flooding your body with Cortisol (stress hormone). This shuts down your Prefrontal Cortex (the logical part of your brain).
The Result: You enter "Fight or Flight." Since you can't fight the market, you flee (sell). You sell at the bottom because your brain perceives the loss of money as a literal threat to your survival (Loss Aversion).
The Scientific Reality: Studies in Prospect Theory show that the pain of a loss is psychologicaly 2x more powerful than the pleasure of a gain. You will irrationally sell to stop the pain, even if holding is the smarter logical move.
Part 2: The "Dashboard"
How to Measure Emotion with Data
You cannot trust your feelings. You must trust data. Here are the specific "speedometers" professional investors use to identify Euphoria (Sell Zone) and Panic (Buy Zone).
Indicator | Panic (BUY SIGNAL) | Euphoria (SELL SIGNAL) | Why it works |
VIX (Fear Index) | Above 30 | Below 12 | Measures the cost of "insurance" (options) on stocks. High VIX = high fear. |
RSI (14-Day) | Below 20 | Above 80 | Measures how fast price is moving. Below 30 means sellers are exhausted. |
Buffett Indicator | 70% - 80% | > 140% - 200% | Total Stock Market Cap divided by GDP. Shows if the market is overpriced vs. the real economy. |
AAII Sentiment | High Bearish % | High Bullish % | A survey of retail investors. When everyone is "Bullish," there is no one left to buy. |
Most beginners look at the price. Professionals look for Divergence.
Bearish Divergence (Top Signal): The Stock Price goes HIGHER, but the RSI goes LOWER.
Translation: The car is moving forward, but the engine is dying. A crash is coming.
Bullish Divergence (Bottom Signal): The Stock Price goes LOWER, but the RSI goes HIGHER.
Translation: The car is rolling back, but the driver is stepping on the gas. A reversal is coming.
Part 3: Historical Autopsy
Let’s look at two major crashes to see how these signals worked in real life.
Case Study 1: The Dot-Com Bubble (2000)
The Euphoria (1999): The Buffett Indicator hit a record 159%. People were quitting jobs to day-trade.
The Signal: The "smart money" was selling while retail investors were buying.
The Result: The Nasdaq fell 78%. Those who bought at the "Euphoria" peak lost nearly everything.
Case Study 2: The Great Financial Crisis (2008)
The Panic (Late 2008): The VIX index spiked to nearly 60 (extreme terror). The Yale Crash Confidence Index showed that 85% of people expected a crash after it had already happened.
The Signal: The RSI on monthly charts was deeply "oversold" (<30).
The Result: If you bought the S&P 500 when the VIX was at 60 (peak panic), you would have seen massive returns over the next decade.
Part 4: The Control System
Your 3-Step "Neuro-Hack" Strategy
How do you actually do this? You need to build a system that bypasses your amygdala.
Step 1: The "Pre-Commitment" Contract
Write down a rule set now, while you are calm. You cannot make decisions in the heat of battle.
Rule: "I will not sell any stock unless the fundamental business has failed."
Rule: "If the market drops 20%, I will not sell. I will buy $500 more."
Step 2: Automate the "Contrarian" Buy
Do not rely on willpower to buy the dip. You will be too scared.
The Strategy: Set up limit orders at prices below the current market.
Example: If Apple is at $150, set a "Buy Limit" order at $120.
Why: If the market crashes while you are sleeping (or panicking), the computer buys for you automatically. You profit from the panic without feeling it.
Step 3: Invert the News
When the news says "Market Rally Unstoppable!" -> Check your RSI. Is it above 70? If yes, stop buying. Maybe trim some profits.
When the news says "Market Meltdown! End of Times!" -> Check the VIX. Is it above 30? If yes, this is the "Sale of the Decade."
Summary Checklist for the Beginner
Stop looking at your portfolio daily. This reduces cortisol spikes.
Dollar-Cost Average (DCA). Invest a fixed amount every month, regardless of price. This mathematically forces you to buy more shares when prices are low and fewer when they are high.
Watch the VIX. If it crosses 30, force yourself to invest a little extra money. Over 40? more.
