The Herding Effect
Investors act just like a herd. It’s safe and it is easy. It is also dangerous because crowds rarely recognize the end of market trends as they are happening, and they extrapolate current trends—and gains—into the future just when the trend is actually changing. Back to back 20% gains in the stock market in the late 1990s were forecast into the future, and just one look at the year 2000 shows that it did not quite unfold that way.
At the start of a bull market in stocks, the fundamentals are usually bleak. Earnings, as reported for the previous quarter, are low. Sentiment or market mood is poor, and nobody is really interested in the market at all. And during it all, stock prices start to rise.
Investor sentiment is market ...