Sunday, July 03, 2011

Pessimism, Skepticism, Optimism & Euphoria

Buy during times of pessimism: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

Among the maxims that I know, the one mentioned above is one that I like to commit to my memory.

Maximum pessimism here, means that most people if not all, are pessimistic about the stock market. At this time, the market is very quiet, volume transacted is very low, nobody wants to talk about equities, and more and more remisers are going for their holidays. How long this period will last? Nobody knows. During this period, political news and economic news will be bad not only in your own countries but in foreign countries as well. Most people will be in a state of despair. Some may even be cursing and vow not to touch equities again. But savvy investors will be building up their portfolios. They will buy slowly; they will take their time to pick and choose undervalued stocks. You can be sure that many such stocks will be on offer.

Someday the market will start to move up. But there will be many false dawns. Slowly and quietly, as the market continues to improve, skepticism surfaces. At this stage, many are doubtful, and many are still fearful and critical. From skepticism, the markets moves to optimism. Volume improves and prices move up daily. More and more people are throwing cautious to the wind. Those who have the courage to enter the market make money. They buy high and sell higher.

As the market continues to improve with more encouraging news daily, newbies commence to come in droves. Initially all will make money. They call this: "Beginners' Luck."

The last stage of a bull market is the stage of euphoria. It is at this time that many will say, "this time is different." The sad truth is that "this time is different" will eventually turn out to be the most expensive four-word sentence. I call this euphoria, "Extreme Optimism."

During this period of Extreme Optimism, all the small boys will be involved in the stock market. Hawkers, ice-creme sellers, vegetable sellers, shoeshine boys and even barbers will be talking about the market. Price improvement will be phenomenal and something that is to be expected every trading day. Every tip turns out to be a winner.

"The market is most dangerous when it is most attractive." This is another maxim you should not forget.

Whether you want to buy low and sell high or buy high to sell higher is entirely up to you.

You and only you alone know your own risk-tolerance.

In the stock market, if you do not have knowledge, wisdom, patience and discipline, you will find that making money here is most difficult whether you invest or trade. Upgrade yourself first before you think of profit.