Thursday, March 5, 2009

The Psychology Of The Investment Cycle

As I've stated in the past, my main interest revolves around mass human psychology. The graphic below summarizes the evolution of human psychology through the investment cycle. We start with optimism (1982), it grows into excitement and thrill (80's/90's), and finally has a grand finale filled with euphoria (1997-2000)! Can we say DotCom stocks?

SOURCE: Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, by Charles MacKay, Published in 1841

As the markets start to "rollover", we become anxious (1999-2001: stock meltdown, 9/11). This anxiety, fueled by the media, evolves into a brief state of denial (2001-2007). The realities appearing on the news every night transform into a state of fear (2007-present). The denial has ended and most realize that we have some serious problems that will take some significant time to resolve. The fear gets reinforced by the media and the constant replay of the progressing negative developments. The cycle forecasts that depression, panic, capitulation, and desperation await us.

So what should we do? Now that you realize that we're evolving through a natural cycle and you know what is coming next, then plan accordingly. Protect the things most important to you. Most importantly, remember that hope, relief, and optimism will always be waiting on the other side (2014-16). After the cold winter, spring emerges and fresh flowers are once again growing with their amazing beauty. Patience, knowledge, vision, leadership, relationships, and faith will guide you well.

Additional versions of the concept:

Sources: RMB Unit Trusts,

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