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b"Buy High, Sell Low, Repeat until Broke
One of the most reliable ways to lose your shirt in the stock market is to buy high, sell low, rinse and repeat. After a while: Presto! No more shirt!\\xa0 Of course, no one puts their hard-earned cash into the market intending to follow this formula for disaster, but a disturbingly large number of people do it anyway. Why is this money-shredding pattern so common?\\xa0 How is it that timing market trends is so difficult? The simple truth is that markets and investors are susceptible to the twin engines of greed and fear that drive short-term crowd psychology and thus stock prices. Trying to play catch up to rising stock prices or cutting losses after their decline are recipes for poor results. Buying a ticket right at the beginning of a long ride up or stepping off just before it plummets back to earth requires superhuman foresight\\u2014or, more likely, very lucky and unrepeatable timing.
Efficient Markets or Crowds Animated by Greed and Fear?
Efficient market theory claims that markets gather all available information about every company in the stock market\\u2014including their future earnings\\u2014and then \\u201cprice in\\u201d this information in close to real time. Stock prices are said to reflect this collective knowledge, the unseen hand of the \\u201cefficient market.\\u201d The efficient market is supposed to reduce the number of \\u201cmispriced\\u201d stocks which would present long (buy) or short (sell) opportunities. But one person's \\u201cefficient market\\u201d is another person's \\u201ccrowd,\\u201d and crowds are notoriously fickle, ruled by greed and fear, and prone to a dangerous, over-reactive herd mentality. Aligning stock picks with a supposedly efficient market by trying to spot stocks that have recently risen and then riding those stocks' coattails is another way of expressing a \\u201cfollow the crowd\\u201d approach. We know from countless market casualties, large and small, that following the crowd as an investment philosophy is a dubious proposition.\\xa0 In fact, while it sometimes works in the short run, in the long run, it's a terrific way to go broke. Impulsiveness, lack of discipline, and financial illiteracy all conspire to make following the crowd an exercise in wishful and usually very expensive thinking.
Forever Playing Catch Up
Many investors think they are being smart by not trying to second-guess experts or the recent direction of the market\\u2014most often during a bull run. But the reality is that they are still greedily chasing after price gains that have already happened and literally passing them by. Playing catch up in this way is very often disappointing. In many cases, it becomes clear in hindsight that a large portion of a stock's gains comes shortly after its last bottom, meaning that later investors reap less upside. If you're late to the game, you stand to gain less than early birds, and you're taking on more risk. Greed's rewards are watered down. Some pursue \\u201cmomentum\\u201d stocks\\u2014stocks of companies that have shown strong growth in recent months or years.\\xa0 The problem is that no one knows for sure if that momentum will continue with further price gains in the short term or how large those might be. If anything, the market is usually ahead of itself, factoring in expectations of future earnings gains. What this means is that the current price already reflects what the stock will be worth at some point in the future\\u2014if everything goes well and nothing surprising happens (good luck with that).\\xa0 Again, chances are that you've probably missed the price appreciation driven by expectations of future profits. Not only is your upside limited, but if those expectations of earnings growth don't come to fruition, you will be left holding the bag. The timing could go either way in these scenarios. For this reason, any honest market veteran will tell you that timing is a fool's errand.
Fear and Capitulation\\xa0
On the fear side of the equation,"