| We've all been frustrated in the stock market | | | | more profit is made, to be replaced by the fear of |
| before, haven't we? | | | | losing the profits already made. It will come a point in |
| Did you remember the time when you identified a | | | | time when the satisfaction of more profits becomes |
| really good stock with really good news on its heels | | | | zero to be totally consumed by the fear of losing the |
| and rallying strong? However, just a couple of days | | | | profits that was already made. At that point |
| after you buy shares of that company, it pulls back | | | | onwards, investors start taking profit by selling and |
| and you incurred a loss? Even worse when you used | | | | thus a pullback in price. That point seems unusually |
| futures on that stock instead? | | | | correlated amongst human beings and once the first |
| Didn't it make you wonder why such strong stocks | | | | sight of profit taking occurs, the rest succumbs to |
| pull back so strongly? In fact, why does stock | | | | their fears too and sell off. |
| markets even pullback as a whole? | | | | Did you remember the first time you made a profit in |
| There is an explanation to this and it is what we | | | | the stock market? Did you remember how it felt |
| refer to in economics as the "Law of Diminishing | | | | when the figures turned green in your trading |
| Marginal Utility". The Law of Diminishing Marginal Utility | | | | account for the very first time? You were elated, |
| states that as consumption of something increases, | | | | weren't you? You wanted more profits, didn't you? |
| the satisfaction (marginal utility) of having that | | | | However, did you remember how more and more |
| something decreases as every unit of that same | | | | uncertain you became as the profits grew higher and |
| thing is given to that same person. | | | | higher? Did you ask yourself if you should continue to |
| Too abstract? Well, it really means in layman terms | | | | hold on and bet for more profits or simply get out |
| that the more of something a person have, the least | | | | while the going is good? Did it come a point where |
| the satisfaction in that thing in question. Have you | | | | your fear of losing that profit totally consumed any |
| ever been to a buffet? Can you remember the | | | | satisfaction derived from have more possible profits? |
| satisfaction of that first taste of food after having | | | | What did you do then? |
| prepared for this by starving for the day? However, | | | | Well, we all know that now, don't we? |
| can you remember how less satisfied you feel with | | | | So, the Law Of Diminishing Marginal Utility made |
| every new plate of food until you can no longer | | | | certain that no stock nor market go up ceaselessly |
| derive any satisfaction from eating? | | | | so nobody, but the most disciplined and patient |
| That's the exact same thing happening in the stock | | | | investors could make a consistent profit. Are you |
| market. | | | | that kind of disciplined and patient investor? |
| The satisfaction of a profit diminishes as more and | | | | |