Whenever a correction happens, there will always be a few expected reactions going on in the investing community. Firstly, people will naturally be fearful and as a result, petrified, resulting in a period of inaction and procrastination. Secondly, we will have the gamblers that are always looking for the lowest of prices. These people artificially increase the pessimism on social media and chat groups, and will also miss out on getting the price they want and thus miss the upside as well. Lastly, we have the greedy investors that will buy the dip without much reason only hoping for the market to rebound immediately for a quick buck. Such impulse usually leads to stacking losses and illiquid assets when the market continues trending lower or consolidates sideways for a prolonged period of time. What I am trying to point out is not the prevailing kinds of investors in the market but rather the overall impact on the market which usually results in excessive pessimism or over-optimism. In today’s post, we will discuss the mental models of investors and how we can capitalize on their decisions made under the influence of greed, stress, and impulse.
Enduring periods of pessimism
As we speak, we are facing the pessimistic impacts of the Omicron Variant. At the moment, you will see new articles sprouting all sorts of scenarios such as the virus resulting in a full-fledged lockdown or that this is all just a hoax. Despite the lack of details of the new variant, the investing world basically jumps on the bear and makes global stock prices slide down aggressively. To overcome the temptation to sell as prices descend, my strategy has been to sell first and wait for better entry prices in the midst of a panic market. This will not only ensure that you bought back at a lower price but it also means that you have locked in the profits from the last exit.
Managing over-optimism
This point is going to sound a bit repetitive mainly because the obvious strategy to combat over-optimism is to maintain a realistic profit target. This will inevitably mean that you will almost consistently miss the peak, however, if you are trading in a turbulent situation such as the pandemic, one cannot be too cautious and sell first when the profit target has been met. Having said that, we are also preventing ourselves from being caught in a state of euphoria which will only lead to eventual losses. As mentioned multiple times on my blog, nothing will go up indefinitely and even if you have made a decent yield from your initial tranche, you will be tempted to buy at a higher price only to realize that the price is going to correct itself when you least expected causing you to break even immediately or go into red territory.
Learning how to wait when everyone is pressing you to make a move
When I was still new in the investing scene, I was constantly seeking validation from both unknown or self-proclaimed investing gurus on the internet for their tips and signals. Every once in a while, these gurus or just regular members will “sell” their ideas aggressively or dump on a random counter to such an extent that you will feel overwhelming confidence or fear instantly. As such, you will have to practice self-discipline and avoid being affected by their comments. Always do your due diligence beforehand and stick to the plan that you have.
Closing Thoughts
Pessimism and optimism do affect stock prices but they should never affect your plans ahead of time. If anything, they should be assisting to push prices closer to your targets. Hence, if you are able to consistently achieve the state of the market working for you to hit your targets sooner, then you will be well-positioned for greater sustainable yields and trading income.
