The Pendulum Of Investor Psychology

Swings in emotional psychology strongly influence the economic and corporate profit cycles. They also play a very prominent part in causing ups and downs in the investment world, especially in the short run.

The mood swings of the securities markets resemble the swing of a pendulum. They swing between the following:

• Between euphoria and depression
• Between celebrating positive developments and obsessing over negatives
• Between overpriced and underpriced
• Between greed and fear
• Between optimism and pessimism
• Between risk tolerance and risk aversion
• Between urgency to buy and panic to sell

It is from the extremes of the cycle of fear and greed that arise the greatest investment profits.

Few people are always even keeled and unemotional. For this reason, few investors are capable of staking out a midpoint position that balances greed and fear, and staying there.

The market spends very little time at the happy medium, it spends the majority of time above or below the averages.