FEAR AND GREED

As we know, peripheral stock market events are the main driver of short-term share price movements. But alongside them, basic human nature is at work too. Fear and greed also have a heavy influence on market movements. In particular, greed has recently led to the downfall of many private investors in early 2000. Caught up in “dot com fever”, investors put to one side valuation to instead climb aboard surging share prices. But when, all of a sudden, everybody started to realise their dot com growth expectations were far too optimistic, many portfolios began to fall apart.

It’s clear that investors factored in far too much profit growth potential to justify those companies’ then valuations. If you take just one message from the dot com bubble, it is “valuation is important!”. Of course, for those wishing to sell their dot com investments, the boom was more than welcome. Rather than wait many years for the share price to reflect the underlying progress of their company, sellers were presented with a long-term share price in the here and now.

So, another lesson. Although you should take a long-term view with any prospective investment, always consider selling if a long-term valuation is offered far earlier than expected.

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