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…The majority of individual investors base their investing decisions on two emotions that rule
the market – fear and greed – and, as a result, end up losing money more often…[than making] money. [That being said,] if you can keep your emotions in check you can take advantage of other investors emotions – irrational exuberance – and make yourself some easy money. It’s a surefire way to make loads of money investing in the stock market.
The original article by Jon Dulin has been edited here for length (…) and clarity ([ ]) by munKNEE.com to provide a fast & easy read.
What Is Irrational Exuberance?
Irrational exuberance is when we as humans stop thinking clearly and allow our emotions to completely control our thoughts and decisions…This is what happens when emotions enter into our decision making process. It’s all part of behavioral finance. We get greedy and buy without thinking [and] then we get scared and sell without thinking, so how do you make money off of irrational exuberance? There are two ways.
#1. Keep Your Emotions In Check
…Learn to not allow your emotions to cloud your decision making process. Think back to all of the times when you made decisions based on emotion. I bet the majority ended poorly.
To help you keep your emotions in check, here is a quick process to follow.
- Stop and think
- Before you make a decision, pause for a minute and ask yourself if you are acting rationally or emotionally.
- Step away
- In most cases, you can clearly tell if you are acting rationally or not. Sometimes, [however,] emotions present themselves as rational decisions so you should step away for a few days before coming to a decision.
- Review
- After a few days have passed, and you [have] had time to think things through, what conclusion do you come to? Is it the same one?
Many times by stepping back and thinking through issues, we allow ourselves to get control and make smarter decisions that are not based on emotion.
#2. Do The Opposite Of Others
…When everyone – and I mean everyone – is telling you to invest in something, this is your sign that irrational exuberance has taken hold and you need to do the opposite. If you own what is hot, this is your cue to sell. If you don’t own, this might be a good time to short whatever it is that is hot…
The caveat here is that you will never be able to time the market perfectly. You might get lucky and sell at the peak or buy at the low, but odds are you won’t…The key here is looking longer term. You aren’t looking to double your money overnight. You are looking to make a large amount of money in a short period of time, say 1 to 2 years.
Final Thoughts
[What I have presented above should be]…your action plan…[on] how to take advantage of irrational exuberance. Like I said at the start, it is easy to do. All you have to be able to do is keep your emotions in check. If you can do this, there is no reason why you can’t be making money while others are losing their shirts…
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