Overconfidence I'd bet almost everyone reading this believes they're a better-than-average driver. In college, I had an argument with a friend about what a horrible driver he was. "How many cars have you totaled?" I asked. (The number was three in the previous four years.) "Yeah, but they were all somebody else's fault!" he exclaimed. Enough said. When things are going well in the markets, investors often confuse a bull market with their own genius and think they'll know when to get out. Of course, it doesn't work out that way. The Herd Effect How many times have you been looking for a place to eat and walked past an empty restaurant to wait at a crowded one? We've seen this time and again in investing, like when people piled into dot-com stocks, crypto, cannabis stocks and meme stocks because that's what everyone else was doing. Being aware of these concepts can help you question your own decision making and ensure that you're thinking critically about each buy and sell. You can also use stock charts to test your opinion. For example, in early 2021, AMC Entertainment Holdings (NYSE: AMC), the poster child for meme stocks, took off. The stock moved from the $20s (split-adjusted) to over $600 in a few months. And keep in mind, this was not some new tech company or a biotech that had a cure for cancer. AMC is a movie theater chain. And you'll recall that in 2021, no one was going to the movies. So it made no sense that everyone was piling into the stock. Let's say you were on Reddit or some other message board reading about AMC and all the reasons it should go higher. One look at the parabolic move on the chart would tell you to be very careful... because when the stock stopped going higher, it was likely going to reverse quickly. Technical analysis is simply the visual representation of investors' emotions. The more aware you are of those emotions and behaviors and how to interpret them, the better a trader and investor you're going to be. Good investing, Marc P.S. Who was your Dr. Pruden? Share the story of your most influential teacher or mentor in the comments section HERE. |
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