Mastering Fear and Greed

While investing in equities is far from an exact science, many successful money managers have advocated the importance of fundamental analysis in sound portfolio management. Essentially, they argue that it is the rational, disciplined and hard-working investor who consistently succeeds in the long-term game of equities. However, often motivated by greed and impulsed by fear, one of the greatest difficulties that investors face is not beating the market, but beating themselves.

As markets essentially reflect the attitude and expectations of participants, it is hardly surprising that shares are influenced by emotional and psychological factors. As Benjamin Graham pointed out more than fifty years ago, 'the super-contagious emotions that swirl around the market place' inevitably play their part in exaggerating share prices. Indeed, history is littered with examples of speculative booms and busts arising from such irrational behaviour, including the 'tulipmania' of the 17th century and the Great Crash of 1929.

However, trying to beat the market at its own irrational game is a task easier said than done. Investors throughout the world have tried to develop trading strategies which attempt to exploit market frailties. For example, momentum investors often try to identify stocks with which the market has a love affair and piggyback on this upwardly spiralling bandwagon. Alternatively, chartists rely on sophisticated analysis of share price graphs to identify trading opportunities. Speculators also regularly bet on the outcome of information announcements or the market's reactions to these releases.