The Most Important Thing Is … Awareness of the Pendulum
The Most Important Thing Is … Awareness of the Pendulum
This chapter is about another important requirement for successful investing: awareness of the markets’ pendulum-like swings. Investment markets swing like a pendulum: between euphoria and depression, between celebrating positive developments and obsessing over negatives, and thus between overpriced and underpriced. The pendulum also swings with regard to risk tolerance versus risk aversion. This oscillation is one of the most dependable features of the investment world, and investor psychology seems to spend much more time at the extremes than it does at a “happy medium.” One thing of which we can be sure is that extreme market behavior will reverse. Those who believe that the pendulum will move in one direction forever—or reside at an extreme forever—eventually will lose huge sums, while those who understand the pendulum’s behavior can benefit tremendously. This chapter includes points and insights from four well-known investors and investment educators.
Keywords: pendulum, risk tolerance, risk aversion, investment, psychology, market behavior, investors, risk
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