Markets are essentially irrational. We can explain this irrationality in many ways. On the one hand, we have mass psychology. In other words, the mass is wrong quite often. In fact, it is quite clumsy. On the other hand, we are talking about very complex systems with extremely erratic patterns. So investing is guessing. That is, we invest with certain expectations. In this sense, at least in the short term, the markets are a set of collective opinions about the future. The problem is that the future is unknown. This paradox explains the fluctuations. Volatility is doubt. Words more, words less, a market is a roller coaster of emotions.
The future is an expectation. The past is history. The present is perception. Rather, the market is subjectivity. The press invents what it does not know. Bulls sell optimism. Bears sell pessimism. And today’s narrative will almost certainly be replaced tomorrow. Value is abstraction. Everything is an illusion. But, fortunately, not everything is absolute chaos. Over time, we have discovered that “bull markets are born in pessimism, grow in skepticism, mature in optimism, and die in euphoria”.
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Markets are governed by sentiment. Let’s talk about fear first. The average investor tends to fall for the hype. For some strange reason, he thinks that the bad thing is worse than it really is. On the other hand, he thinks that losing streaks are longer lasting than they really are. So, you overreact all the time. We could say that the markets are quite dramatic. The fearful sell, because they think the price is going to fall. And the price goes down because of the fearful. It is a self-fulfilling prophecy. But in the mind of the fearful it is clairvoyance.
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