Why investors shouldn’t ignore stock market sentiment

Stock Market SentimentBuy when the blood runs in the streets. ~Nathan Rothschild

If wealth creation is your aim then investing at least some of your money in the stock market can be a great way to achieve above average returns, if you know what you’re doing.

The problem for most people is that they don’t really know where to start, so they avoid the stock market altogether. And that’s a shame really.

However if the stock market does have some appeal to you and you’d genuinely like to know where to start then my advice would be to take a close look at successful investors, the professionals, and see how they approach the process.

Look at what they do because if it’s worked for them then it’ll probably work for you.

The legendary investor Warren Buffett once observed that markets are driven by fear and greed. And greed always trumps fear.

When stock markets start moving quickly on an upward trajectory, amateur investors are tempted to join the party, particularly when the return on cash deposits is low.

The problem for amateur investors is that by the time they notice what’s happening in the market, all the real bargains have gone. So they tend to join the party at the wrong time and then over-pay for the stocks they buy.

Stock Market SentimentMy underlying point here is that market movements tend to be exaggerated, in both directions.

The collective herd behaviour of investors tends to cause the market to overshoot fair value when it’s rising and then fall way below fair value when it’s in decline.

Stock prices are driven by the economics of supply and demand.

When lots of money is chasing a relatively few stocks then the price of those stocks keeps going up. Until professional investors realise that the stocks have become overpriced, relative to the underlying fundamentals of the businesses involved.

At this point fleet-footed professionals sell and bank the profits.

Amateurs tend to be slow to notice a downturn but when they do, they lose their nerve and sell. Usually that means they sell at a loss but also, as the index has by now hit an exaggerated low, they actually sell for less than the underlying value of the asset. Thus creating more bargains for professional investors.

So what signs are professionals looking for to allow them to bag a few bargains?

The answer to that is simple. Successful investors know that the best time to buy is when everyone else is heading for the hills. When there’s a panic going on.

That’s when you’ll find the real bargains.

The market is always volatile of course but had you invested in 2008 for instance, when market conditions were as dire as they get, and you held your nerve, then you’d be sitting on some very good returns over the past 10 years.

And what sign tells successful investors it’s time to sell?

Well they know that the best time to sell is when the ordinary man and woman in the street are starting to talk about the stock market and the shares they’ve just bought.

When everyone has bought into the market, then professionals know that demand must start drying up and without demand prices can’t keep going in an upward direction. So they know it’s time to bank some profits.

Personally, I view the market through a contrarian lens and so far that approach has served me well.

I look for value but it gets harder to find the more market sentiment lifts prices to levels which defy sound investment logic.

Again to reflect on Warren Buffett’s investing philosophy; he suggests you should be greedy when people are fearful and fearful when people are greedy.

Stock Market SentimentThe key to successful investment is that you must never lose sight of stock market sentiment and signs for when the market might turn, either up or down.

And never listen to anyone who tells you that it’s different this time. It’s never different.

Markets fundamentals never change, not in my experience certainly.

So that’s what I think but what’s your opinion?

Please share your thoughts and experiences with me. I’d love to hear from you dear reader.

However if you’d like to know more about legendary investor Warren Buffett and his approach to investing then you’ll find plenty of books on Amazon if you CLICK HERE.

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© Roy J Sutton and Mann Island Media Limited 2019. All Rights Reserved.

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