Market cycles and emotional behaviours
In the context of investments, the psychology of crowds refers to how collective emotions and behaviors influence financial markets and investment decisions. Here are key aspects of crowd psychology in investment contexts :
In the context of investments, the psychology of crowds refers to how collective emotions and behaviors influence financial markets and investment decisions. Here are key aspects of crowd psychology in investment contexts:
- Herd Behavior: Investors often exhibit herd behavior, where they follow the actions of the majority without independent analysis. This can lead to asset bubbles or crashes as investors pile into or exit investments based on the actions of others rather than fundamental analysis.
- Friendly advice : Look at balance sheets, financial statements, macro-economic data...
- No need to have too much inputs, just diversified (as your portfolio) datas between segments (psychology, financials statements, macro-economic data...)
- Friendly advice : Look at balance sheets, financial statements, macro-economic data...
- Emotional Influence: Crowd psychology is driven by emotions such as fear, greed, and optimism. When a large group of investors experiences strong emotions collectively, it can drive market sentiment and impact asset prices beyond rational valuation.
- Friendly advice : Elaborate a to-do list like a pilot would with the information mentioned above before each order you place; this will help you avoid FOMO
- Keeping a record of your previous errors and successes can be useful in learning to be more insightful.
- Market Momentum: Crowd psychology contributes to market momentum, where positive or negative sentiment can create self-reinforcing cycles of buying or selling. This can lead to overvalued or undervalued market conditions.
- Friendly advice : learn Contrarian Investing
Contrarian Investing
Contrarian investing involves buying assets that are currently unpopular or undervalued, going against prevailing market sentiment. The goal is to profit from potential price recoveries when market sentiment eventually shifts.
Contrarian investors believe markets can overreact, leading to mispricing of assets that offer value opportunities in the long run.
- Behavioral Biases: Investors within a crowd may exhibit cognitive biases such as confirmation bias (seeking information that confirms existing beliefs), anchoring (relying too heavily on initial information), or herding (following the actions of others).
- Friendly advice : Read Damodaran's book named "The Little Book of Valuation"
Professor Aswath Damodaran
You almost never start valuing a company or stock with a blank slate.All too often, your views on a company or stock are formed before you start inputting the numbers into the models and metrics that you use and, not surprisingly, your conclusions tend to reflect your biases.
- Contrarian Opportunities: Understanding crowd psychology can present contrarian opportunities for value investors. Contrarians may capitalize on market overreactions or mispricings caused by herd behavior and emotional swings.
- Friendly advice : It's not necessarily bad to follow the crowd except during periods of capitulation and euphoria.
- Impact of News and Social Media: Crowd psychology is amplified by the rapid dissemination of news and opinions through social media. Trends and sentiments can spread quickly, influencing investor decisions and market dynamics.
- Beware of analysts: they can be biased because :
- if they don't go with the general trend and they're wrong, they'll be blamed by the crowd just as they'll be blamed by their employers.
- they have to maintain good relations with the companies they work for.
- Beware of analysts: they can be biased because :
