---
title: "Person｜European Stock God: 90% of market trends come from psychology"
type: "News"
locale: "zh-HK"
url: "https://longbridge.com/zh-HK/news/107209127.md"
description: "European Securities Guru Costorani: Only 10% of the stock market reaction is based on facts, the rest is all psychological factors."
datetime: "2024-02-01T09:28:54.000Z"
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---

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# Person｜European Stock God: 90% of market trends come from psychology

_This article is compiled from Smart Investor._

In "The Crowd: A Study of the Popular Mind," Gustave Le Bon pointed out that once an individual enters a group, their individuality is submerged because the collective thinking dominates. **The behavior of the crowd is often characterized by unanimity, emotionalism, and low intelligence. The isolated individual may be cultured, but in the group, they become a barbarian.**

In the financial market, this kind of crowd behavior is not unfamiliar.

In continental Europe, especially among German and French-speaking investors, when it comes to investment masters, one name is often mentioned: **André Kostolany**.

**Kostolany's position in the German investment community is like Buffett's position in the United States.** **He believes that the key to successful stock market investment lies not in computational ability, but in thinking ability!**

With over 70 years of experience in the stock market, he is hailed as the godfather of European securities and a witness to the stock market in the 20th century. His life spanned two world wars, and he invested in exchanges in Paris, New York, London, Zurich, and other cities.

Many practitioners in today's stock market investment have been trained in value investing, but Kostolany's investment style is different. **He does not belong to value investing or fundamental stock selection. He usually adopts a contrarian thinking approach and buys securities below their intrinsic value.**

He candidly describes himself as a "speculator," believing that there is no stock market without irrational speculation. He has a classic saying: "Rich people can speculate, people with little money cannot speculate, and people who have no money at all must speculate."

To become a successful speculator, Kostolany believes one must possess four elements: money, ideas, patience, and luck.

And his book, **"The Psychology of Securities Investment," is known as the stock market version of "The Crowd."**

> _The book is not like a textbook used in classrooms, but more like a novel written by Kostolany himself. Kostolany himself said, "I am not teaching, I am just telling stories to students."_
> 
> _\- Gottfried Heller_

Today, especially for scholars studying behavioral finance and investor psychology, many of the concepts in the book may not be novel, but they come from the firsthand practice and experience of a "veteran" master in the securities trading industry.

During the era in which Kostolany lived, there was not yet a well-established theory and level of understanding of behavioral finance, which is what makes this book ahead of its time.

He combines a thorough understanding of stocks and markets with a keen understanding of investor psychology. For us today, it is still necessary to read and stand on the shoulders of masters to return to the source and start anew.

This article highlights Kostolany's views on the stock market, investment, economics, and investor psychology, as well as his life trajectory.

It may provide inspiration, especially for the current sentiment-driven A-share and Hong Kong stock markets.

## **90% of Market Trends Come from Psychological Factors**

Kostolany describes this viewpoint in another way: _"Facts only account for 10% of the stock market's reaction, while the rest is all psychological factors."_

People may have different opinions about the percentage in this statement, but the majority should have no objection to the essence of the viewpoint. The combination of psychological factors and the perception of market performance reflects Costorani's shrewdness and wisdom in investment.

He proposed this viewpoint in the 1960s, while the popular behavioral finance, which combines psychology with the understanding of market performance, gradually emerged after the prospect theory was proposed by Kahneman, Tversky, and others in the late 1970s and early 1980s. This also shows Costorani's forward-thinking in his era.

In Costorani's view, the psychological state of stock market investors determines the short- to medium-term market trends. Specifically, whether stocks are controlled by investors with abundant short-term funds and persistence, or by hesitant and easily panicked individuals, will determine the market's next move.

For the medium term, in addition to psychological factors, important factors determining the stock market's trend include interest rates (or liquidity), which determine the supply and demand of market funds. For the long term, psychological factors are no longer important, and fundamental factors become the key.

## **When going downhill, those without wheat will still not have wheat when going uphill**

Based on decades of experience, Costorani summarized the characteristics of the cyclical nature of the stock market.

_In a market downturn, the market continues to decline, and investors fall into a state of severe pessimism. This phase can last for a long time until a stimulating factor intervenes and breaks this vicious cycle. The stock market suddenly develops in the opposite direction, marking the beginning of a reverse cycle, and the market returns to a consolidation phase._

At this point, the stock market will adjust to a reasonable and realistic price level. It then enters a phase of trending fluctuations, where the market fluctuates based on positive or negative news. Finally, it enters a phase of rapid expansion.

He believes that in the latter half of a market decline, investors should have contrarian thinking and bravely join the investment ranks. As brokers at the Budapest Grain Exchange often say, "Those without wheat when going downhill will still not have wheat when going uphill."

It is very difficult for investors to buy in a market full of bearish sentiment. Therefore, independent thinking is a necessary condition for successful investment. It is precisely because of this difficulty that only a few people can profit in the stock market.

## **The unpredictability of short-term market performance**

The creator of value investing, Benjamin Graham, introduced the concept of a personified "Mr. Market" with manic and depressive symptoms to explain the daily performance of the market.

Costorani describes the relationship between the economy and the market as a person walking a pet dog on the street. It is difficult to determine the dog's movement direction because it easily gets distracted, sometimes moving forward, sometimes falling behind, and sometimes randomly running around.

But over time, the dog and the owner will eventually arrive at the same place. When the owner walks 1 kilometer, the dog will run 3 to 4 times the distance. The route of the pet dog represents the volatility of the stock market, while the route of the owner represents the trend of the economy.

## **Respect, but never panic**

On October 19, 1987, known as "Black Monday," the Dow Jones Industrial Average plummeted 500 points in a single day, a 22% drop. In a column written a month prior, the author had presciently questioned how long the global stock market's upward trend could continue and when the turning point would be.

Despite this, the stock market crisis surprised Costolani, who had weathered countless storms in the stock market, but he remained calm.

In summarizing the causes of this crisis, he wrote:

"While I always view excessive pessimism as a bad thing, I have a better understanding of human nature: it was not the deep-seated fear that triggered the stock market crisis, but rather the impulsive nature of human beings directing this market crisis."

This "impulsive nature" includes factors such as index futures liquidation and institutional selling that led to "Black Monday," as well as the panic mentality of the general public.

As Costolani said, the prosperity and recession of the economy, the rise and fall of the stock market, are cyclical patterns like the ebb and flow of the sea.

He believed that although we cannot predict the exact timing of a stock market crisis like oceanographers can accurately calculate the tides, we must always remain vigilant and respectful, avoiding panic. Just like the title of the column he wrote before the crisis:

"The next stock market crisis will definitely come. But in the long run, the market trend will continue to rise."

## About Costolani

Costolani was born in 1906 in a Jewish family in Budapest, and his father was a respected entrepreneur. During his university years, he majored in philosophy and art history, but in 1924, his father insisted that he go to a friend in Paris to study stock trading, thus beginning his investment career.

During World War II, he moved to New York and engaged in securities trading. Most of his wealth came from the post-war reconstruction of Germany.

Costolani's first successful investment was in the late 1920s. At that time, he felt that the bull market in the stock market had lasted for a long time, and the upward trend might not have much momentum left. He began to short sell stocks and bonds, doubting the sustainability of the bull market.

It is said that the stock market crash in 1929 made Costolani an extremely wealthy young man almost overnight.

In the late 1930s, Costolani was deeply concerned about the rise of Nazi Germany and the terrible consequences for Europe. He boldly bet against several European stocks and bonds.

With the market crash, Costolani made about $200,000 (equivalent to about $4 million today) and transferred most of the funds to the United States.

**1\. Investment in Distressed Bonds**

After World War II, Costolani returned to Paris from New York. One of his significant investments was purchasing German bonds issued to foreign investors at 25% of their face value.

![Investment in Distressed Bonds](https://pub.pbkrs.com/uploads/2024/fc18d6aedc15f05da3935a99a78711f1?x-oss-process=style/lg) He believed that the post-war German government would do everything possible to rebuild Germany's reputation, fulfill its obligations, and repay the bonds at face value, including accrued interest.

People around him thought he was crazy, believing that Germany would never honor these bonds. But he remained unfazed and patiently waited. In the early 1950s, when Germany finally redeemed these bonds, he made a fortune.

In the 1980s, he repeated this strategy by purchasing bonds issued during the Russian Tsarist period, which were still traded on the Paris Stock Exchange, for 40,000 German marks, at only 2-5% of their face value. The Soviet government considered these Tsarist bonds illegal and refused to repay them.

With the dissolution of the Soviet Union, Russia needed access to international capital markets for financing and eventually repaid these bonds at 100% of their face value. It is said that this investment earned him more than 100 times his initial investment.

He also experienced failures, even coming close to bankruptcy twice. The first time was shortly after he "bet" on the market's decline and made a huge profit in 1929.

He held a large short position in European stocks and bonds. When US President Hoover unexpectedly announced a significant reduction in Germany's war reparations from World War I, the prices of these stocks and bonds skyrocketed. This not only caused him significant losses but also plunged him into debt.

He referred to this period as the darkest time in his life. With the help of friends, he eventually repaid his debts and made a comeback.

**2\. Financial Writer - Costolani**

According to Costolani himself, at the age of 35, his first career as a securities trader reached its peak, and he could retire with the money he earned from investments. However, a life without challenges that followed made him depressed and developed neurosis.

Under the guidance of a psychology professor, he began his career as a financial writer in the early 1950s, writing books, commentaries, and columns on finance.

He published 13 books on investment, securities, currency, wealth, and investment psychology, with sales exceeding 3 million copies. He also wrote 414 columns for the German magazine "Capital." His works were written in German and French, which is why he is not well-known in the English-speaking world.

His last wish in his legendary and colorful life was to write the first column for the January 2000 issue of "Capital" magazine when the new century arrived.

Unfortunately, he passed away in September 1999 at the age of 93.

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