The Risk–Reward Principle I Didn’t Explain Clearly in My Article on Cyclical Opportunities
If I take a certain risk, how much can I gain — and how much can I lose?
1 March 2026
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Hi, I’m Richard. On this blog I share my thoughts, not investment advice. This is not a recommendation to buy or sell securities.
The Changing Moods of the Stock Market
Investor psychology: fear and greed
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It's no secret that the stock market is primarily driven by two sentiments: the fear of evil and hope for good. Within these broad emotions, we encounter speculation on rising share prices and the anticipation of future earnings. Conversely, we also find the fear of falling stock prices, economic crises, recessions, and collapses.
I devoted part of my university studies to understanding moods—what they are and how they change. Therefore, it’s not surprising that this topic also interests me in the context of the stock market.
How I analyze the stock market
A mood directed towards the future, such as hope for growth or fear of downturns, can be observed through various data. I find it logical to track asset prices within specific segments (geographical or sectoral) in relation to how these segments generate earnings and their value. I compare this data with historical data within the same segment, data from other segments, and the entire stock market's performance.
I have been following data on various indexes and ETFs for years
I use data published by various indexes and ETF funds. As you might gather, I am not analyzing individual shares but collections of shares grouped by specific criteria (read more about stock indexes and ETFs). Since 2022, I have been tracking this data, documenting what the media says about the economy and the stock market, and noting factors that could influence sentiments. This forms my “mood thermometer.”
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Disclaimer
This article is intended for informational and educational purposes only. It does not constitute financial advice, a recommendation to buy or sell any securities, or a guarantee of future market performance. The views expressed are solely those of the author, who may also be an investor. Investing in financial markets involves risk, and each reader should make their own decisions independently and, if necessary, consult with a licensed professional.
Summary
The stock market runs on two emotions — fear and hope. Since 2022, I've kept a mood thermometer: media narratives alongside market data. Prices detached from earnings tell you about psychology, not fundamentals. Self-awareness about your own biases is the edge most investors lack.
Common questions about this topic?
What drives stock market prices — fundamentals or emotions?
Both, but emotions play a larger role than many investors realise. The stock market is primarily driven by two sentiments: fear and hope. While prices should theoretically reflect the underlying value of assets, behavioral finance research — notably by Nobel laureate Daniel Kahneman — has shown that investors systematically overreact to news and underreact to earnings, leading to price movements that often reflect psychology more than fundamentals.
What is the Fear and Greed Index?
The CNN Fear and Greed Index is a widely used barometer that measures investor sentiment on a scale from 0 (extreme fear) to 100 (extreme greed). It tracks seven market indicators including market momentum, stock price breadth, options activity, junk bond demand, and market volatility. When the index signals extreme fear, it often indicates that assets may be undervalued; extreme greed may signal overvaluation.
What are the most common behavioral biases in investing?
Key biases documented in behavioral finance include: loss aversion — the pain of losing is psychologically about twice as powerful as the pleasure of gaining; herding — following the crowd, which amplifies market trends; anchoring — becoming mentally fixed on a reference point like a purchase price; and overconfidence — overestimating one's ability to predict market movements. Awareness of these biases is the first step to managing them.
What does it mean when stock prices are detached from earnings?
When asset prices rise significantly faster than the underlying earnings or value of companies, it signals that hope and speculation — rather than fundamentals — are driving the market. This detachment can be measured through metrics like the price-to-earnings (P/E) ratio. In the article, these ratios are tracked across market segments and compared historically to build what is called a mood thermometer for the market.
Is buying when there is fear a good investment strategy?
This contrarian approach is advocated by many successful investors, most famously Warren Buffett, who advised to be fearful when others are greedy and greedy when others are fearful. The logic is that fear-driven selling can push fundamentally strong assets below their intrinsic value, creating buying opportunities. However, the article emphasises that this requires deep analysis of whether the fear is justified and whether the asset will perform well over 10 to 30 years.
How can I manage my emotional reactions to market fluctuations?
The article argues that self-awareness about your own biases is the edge most investors lack. It recommends tracking not just prices but also media narratives and your own emotional responses to market events. By documenting what the media says alongside actual data, you build a more objective picture and reduce the risk of making decisions driven by fear or euphoria rather than analysis.
If you have any thoughts, questions, or feedback, feel free to drop me a message at mail@richardgolian.com.
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