Investor’s Common Sense

Lemmings are small rodents, usually found near the Arctic. They are famous for their strange behavior, which has no scientific explanation. Every four years they tend to commit massive suicides by migrating towards the sea and starting swimming, sometimes till exhaustion and death.

Why am I telling this? Well, the thing is, that in the world of human beings massive madness is also very common. The best way to illustrate it is to look at the way people think and talk about money. There are only two main forces that drive our desire to earn more and more money – fear and greed. And the best place, where this two forces could be seen as a reason of a massive madness are the financial markets.

Just imagine, millions and millions of people from all across the world with a desire of becoming rich without much effort. They truly believe, that listening to their local broker or banker (who is pushing them into buying more and more mutual funds and shares, because this is when he makes a commission) will make them really wealthy in no time. The financial institutions know this their weakness, so they start to “advertise” the next “greatest buying opportunity in history” by spreading positive news in the media (like we had in the 1920s, 1950s, 1990s, and the latest during real estate and oil bubble of 2006-2008). The founder of Forbes Magazine has described it very correctly: “Far more money has been made ‘giving’ financial advice, than ‘taking it’ “.

So, how will the average person act when he hears all this “great news”? Do you think he will rush into the market ready to put his life saving at risk? Oh, no. He just waits. He waits till the moment when he starts to hear different stories about how ordinary people like himself became rich, just because they “got in early”. As we know, no one wants to be left behind, so now our ordinary Joe is just scared that the next train will leave without him and also starts to buy “like mad” (Greed factor in play). After a while he is reading some analysis in the magazine which says that the future is as rosy as it will ever get. There is total euphoria. The stock market is climbing. Everyone is happy, everyone is getting rich on the daily basis. And then, unexpectedly, this all ends, though average investor just usually doesn’t see.

At first, the stock market starts a process of distribution and then continues slowly to sell off. The average investor just doesn’t see it. More than that, he decides to play “smart” and buy more shares. The behind this goes like this: if it was a great buying opportunity a month ago, then now, when the prices have fallen, it is the greatest opportunity of the century. Also all the analysts and experts on TV urge people to buy more. So, they buy. And this is where the market really tanks. It falls so strongly, that even the “experts” shift their minds and suggest selling all your holdings. People start to sell in panic (Fear factor). And this is where a bottom is usually in. Then, after a while, when the dust settles, the process repeats itself. It has always been this way, and it will always remain like this. It is just our nature.

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