People are people. Their behaviors never really change. Read history, or better yet, Shakespeare, and the same impulses, motivations, and reactions occur over and over again. Fear and greed play a yin and yang roll in any period. Therefore, good investors can predict panic and exuberance from one period to the next. It is also why being a contrarian and going against the grain of sentiment works so well. The adage is to buy when others are fearful and sell into exuberance.
The stock market is partially a mechanism that values the fundamentals of a business, but it also has a psychological component to it. After all, it is an institution made up of people. Sometimes the fundamental aspect outweighs the emotional one, and at other times, it is the opposite. We have all seen markets driven by momentum, meme stocks with little in fundamentals getting a big play, and then there are the times that profitability means everything. One thing you can count on is that herd instincts are always close by.
Presently, investors are fixated with inflation and higher interest rates, along with what they may do to economic growth. The word recession
is not very far from many lips. In fact, sentiment has been so negative that the stock market has probably priced in much worse than is likely. This leaves opportunity to pick up some bargains, buying when others are fearful. One, however, must have the appropriate time horizon, recognizing that recovery may take time.
Some of the best investors are part psychologists as well as good financial technicians. After all, markets are made up of people, and people are people! Talk with Us.