The cocktail theory developed by Peter Lynch

The theory is a curious cocktail theory developed by Peter Lynch. This theory is encompassed in what is known as market sentiment analysis. As we know, social psychology plays an important role in financial markets. The experience and analytical observation of Peter Lynch, and worldwide fame, he provided great benefits in the world of finance.

But before you jump right into his curious theory, let’s take a closer part of his biography:

This outstanding investor is considered one of the best and most successful investors and mutual fund managers of all time. Lynch graduated from Boston College in 1965 and earned a Master of Business Administration from the Wharton School of the University of Pennsylvania in 1968. His career in the world market is not outrageous or shocking as other famous investors, but despite not being flashy, if was very successful. Peter Lynch, has a large number of fans, and that is that for 13 years (between 1977 and 1990) conducted the largest and most important investment fund U.S. the Magellan Investment Fund.

Peter Lynch is author of the books: Learn how to win beating the street and one on Wall Street, (the latter with John Rothchild). Its investment philosophy made him coin a phrase many basic investment strategies. But his legendary phrase on par is simple: Invest in what you know.

But let’s see what your theory:

As I said before, this simple theory is based on the impressions and emotions from different people. Ie in social psychology. Cocktail theory proposes a peculiar and different vision in making investment decisions. A set of aperciones which facilitates the prediction of the market, and that Peter Lynch developed over the years, after standing in the middle of living rooms in different parties and cocktails, listening impressions about the stock market and investments part of the guests.

According to the theory of reaction cocktail people when exchanged views on the stock market through four phases:

First phase:

When the market has been falling for a long time and people do not expect anything from the financial markets. People do not talk or exchange of shares. In fact, in the first stage of a bull market, no one expected to rise again, people usually do not talk about the markets. At this stage, when someone asked Lynch what he did for a living and he replied: I run a stock mutual fund, they nodded politely and walked away. When not away then sought to change the subject and talk sports for example, the next election, or any subject that has nothing to do with finances. Lynch says that if people want to talk to the dentist about dentures before a fund manager actions, the market is likely to go up.

Second phase:

In the second phase, when the market has risen between 10 and 15%, very few people are aware of it. Lynch account that when he told people he had just met who was involved, they remained close a little longer than the first phase. Maybe just enough to say, how risky it is the business of the bag, before going to also talk with the dentist.

Third stage:

When the market is up about 30% from the lows, Lynch said that he was surrounded by enthusiastic investors asking for advice, and even the dentist seeking some financial advice. At this point, people ignore the dentist and had a separate Lynch to ask what actions should buy. Aim Lynch, who at this point, almost everyone is in the party has already invested money in those or other actions, and talk about it.

Fourth phase:

At this stage, the crowd surrounding Lynch, people are more enthusiastic and more numerous, but strangely this time not for advice, but they are close to giving it to him. And explain what actions should buy. Lynch says that even now reached the dentist has to give me some advice on investment, and it is likely that in the coming days as the actions recommended by the dentist and those of others around him at the party continue to rise. But Lynch says that when everyone tells you what to buy and he repents for not having been ignored, is the sign that the market has peaked, and the downturn is about to begin.

Lynch at the end of his theory, makes an important caveat: He says that the key to successful investing is to buy great companies and ignore the prediction markets. In fact, he states categorically that he does not believe in predictions that are made from the markets.

These simple patterns of behavior in people, perhaps not much to tell a great investor, but I think it can be crucial to learn how to assess the financial emotional moment that we live, it is interesting to find that an appreciation as simple as watching people of around us in everyday life, we can provide guidance in making decisions about our investments.