Living in the Moment
We constantly hear that the market is irrational. Stocks are rarely ever valued according to the company’s actual worth, even considering that mathematical formulas exist to calculate worth. With all of this information available, why is the market constantly irrational?
It's because traders live in the moment.
The average trader has far too much of his portfolio allocated to a specific stock. Anytime this stock price moves, the trader becomes anxious-
It moves up, his dopamine levels increase and he becomes greedy - possibly buying more shares on an upswing.
It moves down, he starts to panic - either buying more shares (thus allocating even more of his portfolio to this stock) or selling for a loss.
The stock market constantly fluctuates up and down in a seemingly random fashion, which means that traders experience an emotional rollercoaster multiple times per day.
This emotional rollercoaster causes them to make frequently poor decisions; selling undervalued stocks and buying overvalued stocks, which results in market irrationality.
To become a successful trader you need to control the natural urge to make these poor decisions. If you invest wisely according to business fundamentals, diversify your portfolio across multiple industries and countries – you'll be able to stand strong in your investment decisions.