Peterson - Sentiment Analysis

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Copyright 2016 by Richard L. Peterson. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data is available:

ISBN 9781119122760 (Hardcover)

ISBN 9781119163749 (ePDF)

ISBN 9781119163756 (ePub)

Cover Design: Wiley

Cover Images: brain social media VLADGRIN/istockphoto.com; summer background

Magnilion/istockphoto.com

To the MarketPsych team. Your inspiration and persistence created something entirely new in the world.

From investor neuroimaging to developing sentiment-based market models, Dr. Peterson spends his time exploring the intersection of mind and markets. Dr. Peterson is CEO of MarketPsych, where he is a creative force behind the Thomson Reuters MarketPsych Indices (TRMI). The TRMI is a data feed of emotions and macroeconomic topics in social and news media covering 8,000 equities, 130 countries, 30 currencies, and 35 commodities. Dr. Peterson has published in academic journals, including Games and Economic Behavior and the Journal of Neuroscience, written textbook chapters, and is an associate editor of the Journal of Behavioral Finance. His book Inside the Investor's Brain (Hoboken, NJ: John Wiley & Sons, 2007) is in six languages, and it and MarketPsych (Hoboken, NJ: Wiley 2010) were named top financial books of the year by Kiplinger. Dr. Peterson received cum laude Electrical Engineering (B.S.), Arts (B.A.), and Doctor of Medicine degrees (M.D.) from the University of Texas. Called Wall Street's Top Psychiatrist by the Associated Press, he performed postdoctoral neuroeconomics research at Stanford University and is board-certified in psychiatry. He lives in California with his family.

As a 12-year-old boy I was befuddled when my fathera finance professorgave me trading authority over a small brokerage account. At the time I didn't understand what the stock market was, and I had no idea how to proceed. He educated me on how to read stock tables in the daily newspaper (this was 1985), call a broker, and place an order. I was set free with my limited knowledge and zero experience with the goal of growing the balance.

To select investments, I first turned to the local newspaper. I reviewed the micro-text of the stock tables. The numbers didn't make sense to memy first dead-end. For Plan B I visited the library, and the librarian referred me to dusty books from the 1960s that extolled the virtues of 'tronics stocks and Dow Theory. Nothing for me here, I thought. I wanted to know what to buy right now, not to learn ancient theory.

Next I went to a bookstore. A young attendant directed me to the magazine section, and the first magazine I picked up listed the Top 10 Growth Stocks of 1985. Perfect! I thought. I went home, called up the broker, and dictated the top 10 names to him, buying shares in each.

Over the next few months, I didn't pay attention to the stocks' performance. About a year later I figured it would be a good time to check in. I expected to hear that I had made big gains. In fact, I fantasized that the broker would soon be calling me for investment advice. When I opened an account statement I sawto my disbeliefthat the account was down 20 percent.

Confused, I went back to the bookstore. I related my tale to another attendant, and he condescendingly informed me, Clearly you bought the wrong magazine. He's right! I realized. This new, wiser guide helped me find a magazine extolling the Top 10 Most Innovative stocks of 1986. I went home, invested in a few of the top 10, and waited. I paid more attention this time, and I noticed that the first three monthly account statements were positive. I felt good, back on track, and I imagined I would be redeemed as a genius stock investor.

A year later, after a nine-month hiatus, I opened the latest account statement. The damage was worsemy account was now down nearly 50 percent from where it had started. This can't be right, I thought. I sheepishly called the broker. He confirmed the loss.

I wanted to understand what the experts knew that I did not, so I started reading books by investing by gurus such as Benjamin Graham and Peter Lynch. I noticed that these books were teaching me not only about fundamentals, but also about psychology. It seemed that many of history's most successful investors used an understanding of investor behavior. Baron Nathan von Rothschild, an early scion of the Rothschild banking dynasty, in 1812 guided investors to, Buy to the sound of cannons, sell to the sound of trumpets. Benjamin Graham wrote, We buy from pessimists, and we sell to optimists. Warren Buffett modernized the saying as, Be fearful when others are greedy and greedy when others are fearful. This advice seemed like useful guidance, but it wasn't specific or easily actionable.