Using Short-Term Market Sentiment to Your Advantage- Buffett Example

Understanding market psychology is one of the most essential characteristics to achieving long-term investment outperformance. Firstly, the vast majority of market participants are focused on short-term performance. If you watch CNBC or Bloomberg, you will see this attitude on full display. There are no shows on either network dedicated to long-term investing. How bizarre is that if you really think about it? The reality is that these networks want daily viewers so the advertisers are happy, so there is a vested interest in promoting short-term trading based on news, momentum, technical analysis etc.

What I mean by this is that many people avoid an investment that is obviously undervalued dramatically, because they believe it may drop more due to some short-term issue. Conversely, they will buy a stock that they believe to be overvalued from an intrinsic value standpoint, because they think it will continue to go up short-term. This is really the definition of speculation.

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