Riding the Emotional Roller Coaster

Dear David,In my previous letter, I talked about the type of news that moves stock prices. Investors don’t always react to news in a rational way. They bring their emotions into the stock market. On occasions when their emotions get the better of them, they may act irrationally and buy stocks simply because they see others buy, or sell because they see others sell. Herd behaviour is commonplace in every stock market and is partly the reason why movements in stock prices don’t always correlate with the news. I’m afraid that’s the nature of the stock market; a lot of the volatility you see in daily stock prices is simply a result of crowd psychology. The sooner you understand this, the better, because it will save you from some dangerous pitfalls. I will describe two powerful emotions that often grip investors and the kind of havoc they can cause to naive and unsuspecting investors. I will show you how you can avoid making the same mistakes…