“As soon as money is committed to a financial asset, so too, is emotion.”
− Martin Pring, Investment Psychology Explained
An investor or trader faces a constant bombardment of emotional stimuli. News, gossip, and sharp changes in prices can set the nerves quivering like the filament in an incandescent lamp unless properly controlled. These outside influences cause the emotions to shift between the two extremes of fear and greed. Once you lose your mental balance, even for an instant, your will and reasoning will be swept away, and you will find yourself acting as the vast majority of market participants act — on impulse.
To counteract this tendency, you must be as objective as possible. Remember: Prices in financial markets are determined by the attitude of investors to the emerging economic and financial environment rather than by the environment itself. This means that price fluctuations will be determined by the hopes, fears and expectations of the crowd as they attempt to downplay future events and their biases toward them. Your job is to try as much as possible to ignore those around you and form an independent opinion while making a genuine attempt to overcome your own prejudices.
The markets themselves are driven by crowd emotions. Nothing you can do will change that; it is a fact that you have to accept. Despite this, becoming a successful investor demands that you overcome your mental deficiencies and rise above the crowd. As a result, you will find yourself outside the consensus.
The practice of contrary opinion is an art and not a science. To be a true contrarian involves study, creativity, wide experience, and, above all, patience; no two market situations are ever alike. We know that history repeats, but never in exactly the same way. Hence you cannot mechanistically conclude, “I am bearish because everyone else is bullish.” Or vice versa.
Knowing when to go contrary is the key!
Excerpted from “Investment Psychology Explained”
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