Investor Psychology

It’s a cliché to say it, but ultimately, all financial markets are driven by fear and greed. Actually, I’d argue that they’re driven almost exclusively by fear. Let me explain…

In the initial stages of a bull market, it’s the fear of the unknown that keep the masses out of an asset class.

They think to themselves, “Yes. I can see it’s cheap. I can see the fundamentals stack up. But what if, blah blah blah. Why is no one buying it? There must be something wrong with it. Best to steer clear.”

For those who overcome this initial fear, or skepticism, and do get into the market, once it starts going up and they have a profit, once again their primary, over-riding emotion is fear… fear of losing their profits. Or, even worse. The fear of a profit turning into a loss.

So, what do most of them do? They sell out for a small profit. That’s why it is said that bull markets are constantly climbing a “wall of worry.” And that’s why ALL markets have corrections. Corrections happen when enough people are FEARFUL of losing the gains they’ve made so far, and start to sell out in large enough numbers to temporarily reverse the trend.

Near the top of a bull market, when most have finally overcome their skepticism, and the savvier participants have taken advantage of one of the numerous corrections to buy into the market, fear again comes to the fore. For those not in the market yet, even at this late stage, what finally pushes them in is the FEAR OF MISSING OUT.

All their friends and colleagues are cleaning up in the market. How stupid they would look if they don’t get a slice of the “easy money” too. And so, they pile in like lambs to the slaughter.
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