in addition to this, i think when one investor fears afraid and rushes to sell his stocks, the rest follows him blindly since he makes their fear become more intense on seeing him afraid

Dear Farouk: You are absolutely right that the anxious investor often follows the herd (and sometimes leads the herd) in panics in the market. The anxious investor responds to the recent, salient and unexpected bad news about the market, believes that this is predictive of a slippery slope of rapidly declining stock value, and sells into the downturn. Of course, it's possible that the anxious investor may be right--perhaps a market is headed for a crash. But the anxious investor may also be responding emotionally and may ignore corrective factors, fundamentals, and cycles in markets.
I also think that anxious investors catastrophize losses and ignore prior gains. For example, I have spoken with some anxious investors who had gained significantly in the market in recent years, suffered a loss of 20% in the past year, and began viewing themselves as facing a catastrophe. In reality, they were still substantially better off than they had been in the past.
The cool-minded investor often takes advantage of panics by looking for bargains in the market, where the fundamentals of a stock justify a higher price. In contrast, by the time the anxious investor has overcome his fear of investing it may be too late. Ironically, the anxious investor may wait for everyone else to drive the market up in value, paradoxically viewing this as a sign that stocks have value--and buy at the high--only to face another downturn or correction in overpriced stocks. This, of course, adds more to their anxiety and to their problematic strategy of investing.
Sometimes the best strategy is to do nothing--but wait it out.
Robert L. Leahy PhD

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