PennyRunners

[TITAN]

Humans are behind the trading activity of the stock market. That means
human characteristics are also factors in how share prices move.
Understanding human psychology is extremely valuable when evaluating
investment opportunities because human psychology creates and
accentuates many of the opportunities that investors can capitalize
on.

For example, greed often causes stocks to go higher than they deserve
to go. By deserve, I mean that they go higher than the present value
of future earnings potential can justify. New information can cause a
frenzy in the market that makes investors lose sight of rational
valuation and simply buy the stock for fear of being left behind. This
phenomenon is the basis for some great speculative bubbles that we
have see in history.

At the same time, fear motivated by negative information can cause
everyone to rush for the exit door at once and take a stock, or entire
markets, dramatically lower very quickly. Much of the selling pressure
that prevails during market crashes is out of fear, not a rational
thought process based on information.

Fear and greed present incorrect valuations in the market that can
exist for relatively short periods of time but long enough for smart
investors to capitalize on. Emotion in the market can be viewed as an
amplifier for new information. It can make moves more extreme than
they should be. However, often the power to this amplifier is pulled
and the stock moves back to where it should reside based on the
information that is known about the company.