Jon was sharing with me this diagram. Not exactly the words in the oval (I added them), but pretty much for the scale from pessimism to optimism and belief to skepticism. I found it apt to relate people in the market.
Non-investors are generally skeptical and pessimistic about the stock market. They believe the stock market is dangerous and it is not worthwhile to take the risk. They believe they cannot make money from it so they stay clear of it. In fact, the scary stock market crashes and bad economic news put them in constant pessimism.
In a bull market, retail investors are rife with greed as they are optimistic about the stock market. As they do not have any strategy or proper risk management, they will believe in whatever tips or recommendations from experts, analysts or friends.
During a market crash, retail investors will turn from greed to fear. Still without a plan to exit the market, they become followers of experts. The news would broadcast all the dire news and the bear calls from economists and analysts. Retail investors will believe them, turn into pessimists and sell their stocks.
[Free Ebook] How should you invest your first $20,000?
We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
To be a successful investor, you need to be a skeptic. You need to have a mind of your own. Do your independent thinking and be skeptical about what other experts say. Do not allow their views to influence you. Secondly, you must be both an optimist and pessimist at the right time (although I drew successful investors on the optimistic side on the diagram, they actually straddle both sides). A successful investor is optimistic when retail investors are pessimistic and he will buy from them. On the other hand, the successful investor is pessimistic when retail investors are optimistic and he sells to them.