Emotions are Contra-indicators

Oct 2018 //
Behavioral Finance

Just because we’ve identified a bargain-priced stock doesn’t guarantee that the stock price will begin to move upward the day after we buy it—or the month after or the year after. During the time that an undervalued stock temporarily becomes more undervalued, there will typically be near-constant pessimism expressed among investors. Indeed, in many cases the pessimism, reflecting concerns of the moment, will seem to be well grounded. The same goes for overvalued stocks, which a value-oriented investor will sell when their prices significantly exceed intrinsic values. It is not uncommon for such overvalued stocks to be beneficiaries of a type of momentum, fed by near euphoria that drives prices even higher. It is the emotional difficulty involved in buying low and selling high that makes success so hard to achieve.