The story is a familiar one: an enduring bull market (whether it is in commodities, equities, etc) often make the general public believe that the trend can continue forever. The greed from being left out of a potential gold mine rises to proportions that create a mad buying frenzy – aptly supported by media and wide-spread mania. This goes on for a while. Then at some time, a fear starts to creep in as the market is not perceived as strong as initially assumed. Over time, this fear turns into panic selling – and often the prices drop to a level way below what it was when the whole craze began – and from which it will take even years to recover.

The most realistic distinction between the investor and the speculator is found in their attitude toward stock- market movements. There is nothing wrong in buying stocks for speculation. There is no crime in that. And if you are buying stocks for speculation it is perfectly proper to take speculative factors into account, which are different from investment factors. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices.

Most people are however into the stock market in search of quick profits – the fast and easy money – and often they develop methods, philosophies, etc that are touted as ways to make money but are controlled by shortsightedness. In fact, in India one could make a wild guess and say that at least 95% of the investments are done with short-term motivations. Naturally, such traders are always looking for (and regularly fed by the media) what can be called short-term stimuli. If news on a given day is good, it is a buy and if news on the next day is bad, it is sell – regardless of the long term economic prospects of the economy or the company. And as such, the search for momentum drives their enthusiasm and trading patterns.

The feeling of missing out on an opportunity to take home a profit is the most psychologically trying and dangerous situation all traders face. Often one experiences more pain from missed opportunities (errors of omission) than realized losses (errors of commission). This is perhaps the ultimate paradox – that our human instinct and desire to fit in with the crowd often paves the way to our financial ruin.

Due to the overwhelming power of the crowd and the tendency for trends to continue for lengthy periods of time on the basis of this strength, the trader is faced with a conundrum: does he or she follow the strength of the crowd or defy it valiantly based on his own analysis. Sadly, if the investment orientation is short-term, the crowd often wins. It is suffice to say that Operations for profit should be based not on optimism but on arithmetic.

The Author is the Founder and Managing Director of Hedge Equities

The post Hope, Fear, Greed appeared first on FWD Life | The Premium Lifestyle Magazine |.