Trading the Markets: Greed
Last time when we talked about market psychology, I talked about how we let fear take over. Read that here. Let’s talk about another big emotion we have to deal with when we go into the markets: Greed.
All of us want to get reach as quickly as we can, and when prices in the stock market start going up, we all want a piece of it. But when the market gets overheated, it almost always ends badly, more so for retail investors, people like you & me. And this happens since this group of people would have the least amount of information possible about any company and its actual value.
The most recent examples of the bad ending to irrational buying and exuberance in the markets were the bursting of the Dotcom Bubble and the 2008 Great Financial Crisis. The “Dotcom Bubble” was a period of 5-6 years in the late 1990s when the prices of tech stocks just went up and up. At the time, it seemed like all a company had to do to get investment flow was pitch any investment with the word "dotcom" somewhere, and investors leapt at the opportunity. It eventually ended with depressed stock prices for 2-3 years. In fact, Microsoft hit its dotcom bubble high again after more than a decade.
In the 2008 crisis, the same kind of thing happened with housing in the USA. And since the USA is the number one economy in the world, most countries felt the tremors of the crash there. You can see this in more detail if you read the book “The Big Short” by Michal Lewis, or see the movie with the same name.
The same kind of thing happened in 2021 after the world markets had soared since the crash due to the pandemic. And the inevitable happened again. Stocks, and crypto too this time, cratered in late 2021.
When people are overtaken by greed, overreactions generally take place and most of the time this distorts prices. Asset bubbles can inflate well beyond fundamentals and you can bet prices would come back to the actual value in time. Adopting a contrarian strategy can help counter greed and fear both, meaning when there is extreme fear in the market, you buy and when there is extreme greed in the market, you sell. If you want to know what the sentiment of the market is, you can read this article. But that’s it for this article about greed.
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