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Caution ahead: Market bounce is breeding overconfidence

Today, I found an interesting video. It is not interesting because of the announced overconfidence on the markets that all the dividend growth and value investors probably know of, but there was one very interesting point about market participants’ behavior, which sparked my attention.

Many times, I was stunned by how irrational investors can be and how stupidly they can act when trading and investing in the markets.

If you ever wondered why sometimes markets react so wildly, Eric Jackson in this video explains it clearly. As he mentioned, last week investors were moving from the stock market into bonds, just to move back from bonds into stocks this week.

Such moves must be extremely expensive! Aren’t they? No wonder that investors usually lose money or are unable to beat S&P 500 index over time and their performance is mediocre.

So, the task is to act as a contrarian. Sometimes, you need to stomach those scary looking moves investors perform out there and stay calm, wait for them to stop overreacting, and then start buying your stocks.

I try doing it that way. When I see panic spreading around, I do not buy right away. I usually wait a few days. If you have time watching markets during the panic period, you will be able to notice and feel when the panic starts slowing down. Some other tools such as VIX index, or Greed & Fear index will help you to gauge the intensity of the fear and when it is slowing down. Then, I use my contingency orders to trail my stocks of interest down and buy at a major reversal from the bottom.

What about you? Do you watch market closely during panics out there to get best price and best value for your buck when buying stocks on sale or you do not care? Share with us your strategy.

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