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Strategy
No. 3:
Understand the Psychology of the Market
If the economic clock is
well understood and the benefits of being a
countercyclical investor are evident, why doesn't
everyone make a killing? The simple reason is human
nature. Two factors drive the share market: greed and
fear. As the value of shares in the share market rises,
most investors want a piece of the action and will buy
more and more shares. This drives the prices up and
leads to further buying. Such a market is known as a
bull market. Everyone is happy, as long as the prices
keep rising.
However, we know that
such activity cannot continue indefinitely. The problem
is that the emotion of greed is often stronger than
rational thought. Conversely, when prices start falling,
uncertainty sets in and most shareholders begin selling
their shares before the price falls too far. As selling
intensifies, share prices continue to fall. Before too
long panic sets in as most investors try to divest
themselves of their share holdings.
This is known as a bear
market.
Although investors who
keep their stocks should be able to sell them for a
higher price once the next cycle comes around, the fear
of loss forces many investors to sell their shares.
Keeping a level head and understanding the market will
give you a distinct advantage. Think how much profit you
could make if you stood away from the crowd and were in
a position to buy when everyone else is selling, and to
sell when the pack wants to buy.
Next:
Look for Value Shares
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