Good advice for tough times

One person's depression is another person's buying opportunity: Download cycle_of_market_emotions.pdf.

Why do we follow the pack and buy houses and stocks when they're fetching top prices? Aren't we the same people who buy two jars of mayo for the price of one and strip the clearance rack when $50 shirts get marked down to $5.99?

Forgive the amateur psychology, but as social animals I assume we crave the security of numbers, even if it means making wretched overpriced investments.

Comments

[David]

Funny graphic. I totally felt like that today and just said that I'm in it for the long run. I watched as my portfolio was dropping like a house in Southwest Florida with a hurricane coming.

So is this the time to for me to buy more cheap stocks, sit on the sidelines or tuck my tail sell and suck up the losses. Like a homeowner I don't want to admit it, but my house built of stocks is not what it use to be. So I tell myself it might turn tomorrow, however I know deep down this is going to last a long time. So for now I sit and do nothing and see what happens.

It's all about Ignorance, Greed, Fear and Emotional pain. The main problem is that the majority of the population is too Ignorant to determine whether a house or stock is overpriced or underpriced. When prices are going up they buy because they are Greedy and Fear that they are missing out on huge profits. They are usually told that now is a great time to buy; this is the standard line in regards to both stocks and houses. When prices start going down they hang on because it is Emotionally very painful to take a loss and admit they were wrong. They also tell themselves that it is a long term investment, even though most wanted a quick profit. When prices go way down, many sell because the Fear of losing everything overwhelms the Emotional pain of taking a loss. The bottom usually results when most are forced to sell e.g. a margin call by their broker or a foreclosure. In regards to sale items at a store, most people can make an educated decision about whether an item is bargain priced so they quickly snap them up i.e. the Ignorance factor is removed.

[Fuzzy Bear]

The cycle of market emotions is nothing new as it is simular to the five stages of grief identified by Kubler-Ross.

Consumers are too busy in their daily lives to take the time to do their homework (research) or just plain fail to do it. Instead, the consumer relies upon the "expert" advice or the hot tip from a realtive or friend which often leads to failure. The business world, special interest groups and Wallstreet clearly understand this weakness in the consumer and take advantage of it.

The consumer that fails to do their research often ends up losing on the investment. Thus, the educated consumer often ends up with a better outcome than those who fail to do their homework.