Understanding Investor Sentiment in the Stock Market is a key part of Investing for Maximum Gains

Opinions change all the time and investor sentiment in the stock market is no different. Instead, use these proven strategies to improve your odds of a profit

Investor sentiment in the stock market has become much more widely divided than usual in the past year or so. Investors in many cases can look at the same sets of facts but interpret them so differently that they arrive at opposing conclusions.

When confronted with unanswerable questions, like the direction of the market, even successful investors may take an interest in market indicators, trading rules, rules of thumb and other kinds of financial hocus-pocus. They may assume this gives them an advantage, even if they have no way of making a decision or checking the quality of an answer.

In cases like that, it’s best to pick a different question that you may be able to solve, or that may at least improve your odds of a profit.

Forget the unanswerable questions. Mostly they just waste your time.

Here are two factors that can improve your chances of making money in the stock market

First, when investors are fearful and have low expectations, stock prices tend to be on the low side, relative to value. They can rise by merely getting back up to average.

Second, hidden value, a key facet of our Successful Investor approach, also works in your favour. Hidden value should eventually start to generate profits, spurring a rise in stock prices.

Each of these two factors improves the odds that prices will go up after you buy. Note, though, that we’re talking about a “buying opportunity,” not a guaranteed profit. Keep in mind as well that the combination may need time to pay off.

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Avoid investor sentiment in the stock market that leads you to sell too early

In any rising market, conservative investors often wind up selling their best stocks way too early. Often they do so because their stocks seem to have gone up “too far, too fast”, or because “I can buy it back on a dip”, or because “they’re no longer cheap”. These are all bad reasons to sell.

There’s a large random element in all stock-price changes. When it seems to you that stocks have gone up “too far, too fast,” it may mean you’re mistaken about how far or fast they should go up. You may be unaware of good things that are going on out of sight and raising their value. Perhaps these things have already happened, and the stock is going up as the news spreads.

In a bull market, “they’re no longer cheap” is a particularly insidious rationale for selling. As we’ve mentioned, most stocks are cheap at the start of a bull market. As time passes and the rise continues, investors get more confident. A virtuous circle develops. Investors are willing to pay ever higher prices for earnings, sales and improving prospects, and this leads to higher levels of earnings, sales and prospects, pushing investor confidence and stock prices higher still. Eventually the fun ends, of course, but conservative investors tend to under-estimate how long it can last.

If you sell when stocks are simply “no longer cheap” (or are “fully priced,” as a broker might put it), you will miss out on a lot of profit.

These key points help sum up the basics of successfully investing in the stock market

Successful investors need to limit their involvement in trouble-prone areas like new issues, start-up companies and illiquid investments.

They need to stay out of companies in which they have doubts of any sort about the integrity of insiders.

They also need to recognize the special risks of investing in fashionable or excessively popular minefields such as Internet stocks in the late 1990s or income trusts in the 2000s.

In fact, you could sum up a lot of the basics of successful investing in these four key points:

  • Don’t depend on luck to make money for you or to prevent losses.
  • Be skeptical of the claims and recommendations of brokers, promoters or anybody else with a vested interest in a particular investment.
  • Don’t do anything stupid.
  • Win by not losing.

One key to a long and profitable investing career is to win by not losing. Stick with our three-part investing approach (see below). Resist the temptation to act on impulse, emotion or tips. Stay out of investments that require extraordinary luck or timing. Likewise for anything that requires you to pay high and continuing fees and brokerage commissions.

Economic problems come and go. But in any reasonably free economy, the long-term stock market trend points upward. To succeed as an investor, all you really need to do is find a low-risk way to cash in on that trend during the good times, and avoid losing all your gains and capital during the inevitable setbacks.

Use our three-part Successful Investor approach to dictate your investment strategy.

  1. Hold mostly high-quality, dividend-paying stocks.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
  3. Downplay or stay out of stocks in the broker/media limelight.

Have you ever fallen victim to poor opinion and beliefs of investor sentiment in the stock market?

How much impact do you think investor sentiment has on the overall stock market?


  • I really enjoy all your insightful articles. The advice often comes when I have just made the mistake; useful cookies? I often have sold too early so your advice rings a bell.

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