Financial markets may evolve over time, but one thing tends to remain remarkably consistent – investor behaviour.

Every market cycle comes with a different story. It could be the excitement surrounding technology stocks, property, cryptocurrencies, artificial intelligence, or simply a booming stock market that seems like it will never come down.

Yet, despite the different narratives, the mistakes investors make tend to be surprisingly similar.

When markets are rising, optimism takes over. Investors become increasingly comfortable with taking risks, and may even start convincing themselves that ‘this time is different.’ (Does that sound familiar?)

Then, when markets eventually turn south, fear quickly replaces optimism. The very same investments that investors could not get enough of near their highs suddenly become the ones they want nothing to do with.

Why does this keep happening?

Let us take a closer look in this post.

We Tend to Follow What Has Recently Worked

One reason is our tendency to place too much emphasis on what has happened recently – something commonly known as ‘recency bias.’

When an investment has performed strongly for several years, it is easy to assume that the good times will continue.

As prices keep climbing, more investors start taking notice. Positive headlines become increasingly common, analysts grow more optimistic, and stories of people making impressive returns seem to appear everywhere.

Eventually, the fear of losing money can be replaced by something equally powerful – the fear of missing out, or FOMO as it is commonly known.

This may lead investors to buy an investment simply because its price has been rising, rather than because its underlying fundamentals and valuation justify doing so.

Ironically, this could be precisely when the risks have become greater.

Fear Works the Same Way, But in Reverse

The opposite tends to happen when markets head south.

As share prices fall sharply, headlines become increasingly negative, and investors may start convincing themselves that things will only get worse from there.

As a result, some may end up selling fundamentally sound investments simply because their share prices have fallen.

This is where emotions can work against us.

A lower share price does not necessarily mean that a company has become a worse investment. If its underlying business remains fundamentally sound, the decline could instead mean that its valuation has become more attractive.

Of course, this does not mean we should blindly buy every stock simply because its share price has fallen.

What is important is being able to distinguish between a falling share price and deteriorating business fundamentals.

We Become Overconfident During Good Times

Another common mistake investors make is allowing strong investment returns to make them overconfident.

During a strong bull market, the share prices of many companies tend to rise together. As a result, an investor may achieve impressive returns even if some of his/her investment decisions were not particularly good.

However, it is easy to attribute those returns entirely to one’s investing ability.

This may subsequently encourage investors to take larger positions, use more leverage, or put their money into companies they do not fully understand.

The problem only becomes apparent when market conditions eventually change.

What appeared to be a brilliant investment strategy during a bull market may simply have been one that benefited from favourable market conditions.

We Forget How Previous Cycles Felt

Looking back at a market crash on a chart is easy. Living through one, however, is a completely different experience.

With the benefit of hindsight, we can see exactly where the market bottomed and may wonder why investors did not simply buy aggressively when share prices were at those levels.

But when you are actually living through it, nobody knows where the bottom is.

There may be fears of a recession, falling corporate earnings, job losses, geopolitical uncertainties, and predictions that markets have much further to fall.

It is precisely this uncertainty that makes investing during such periods so uncomfortable.

However, as time passes, memories of that discomfort gradually fade.

And when the next market cycle comes around, investors may find themselves making the very same emotional decisions all over again.

Having an Investment Process Can Help

While we probably cannot remove emotions from investing completely, we can certainly reduce their influence on our decisions by having a clearly defined investment process.

Before investing in a company, understand why you are investing in it, what you believe the company is worth, the potential risks involved, and importantly, what developments would cause your original investment thesis to change.

If the investment thesis does change materially, that could then be a reason to consider selling the investment and recycling the capital into another opportunity with better prospects.

Having such a process in place gives you something objective to fall back on when markets become volatile, instead of reacting purely to movements in share prices or the latest headlines.

Closing Thoughts

Market cycles may look different each time, but the emotions driving investor behaviour tend to remain largely the same.

When markets are rising, greed, FOMO, and overconfidence can encourage investors to chase investments that have already performed strongly.

When markets are falling, fear and pessimism can cause investors to sell fundamentally sound investments at precisely the wrong time.

And because memories fade with time, lessons learned during one market cycle can easily be forgotten by the time the next one comes around.

For me, the key takeaway is not to try and predict exactly when the next bull or bear market will begin. Instead, my focus is on having a disciplined investment process that I can stick to regardless of what the market is doing.

So, before making your next investment decision, perhaps ask yourself one simple question:

‘Am I making this decision because something has fundamentally changed, or simply because movements in the share price are affecting my emotions?’

Taking a moment to answer this question objectively could go a long way towards preventing us from repeating the same mistakes whenever the next market cycle comes around.

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