During A Bull Run The Stock Market

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During a bull run the stock market has more buyers than sellers. Expectedly, stock prices zoom up. Expecting the bull run to continue, more and more investors enter the market, fuelling an even greater price rise and this cycle gets repeated.
Riding the bull wave, stock prices of fundamentally weak stocks also start to go up. Driven by unrealistic expectations, these unsustainable prices soon start to tumble and the bubble eventually bursts.
At times, investors know that the stock they are investing in is fundamentally weak but they are still willing to invest in the stock, because they feel that some greater fools could be depended on to invest in the stock after they have and this would give them handsome returns on their investments.
'mental accounting', defined as 'the inclination to categorise and treat money differently depending on where it comes from, where it is kept and how it is spent.'
Research in Behavioural Economics shows that gamblers who lose their winnings typically feel they haven't lost anything. The fact though remains that they would have been richer had they stopped playing while they had won enough.
Investors during a bull run tend to behave similarly. Once they have got a certain return on their investment they tend to plough all their returns back into the market. When such money goes into fundamentally weak stocks, investment essentially boils down to speculation.
Investors in general, and especially during a bull run, tend to look at the recent past pattern and assume that the future patterns will be identical to the past ones. This is as good as driving a car looking in to the rear view mirror.
A rear view mirror-driven car will not meet with an accident as long as the road ahead of the car is exactly as it is behind the car. This is rarely the case, both on roads as well as in the stock markets. But, when the stock market is on an upswing, the more investors tend to believe that it will keep going up forever.
They mistake probability for certainty. They pump in more money into the stock market and this always does not go into the right stocks.
Marketing research has shown that the typical Indian buyer's decision is heavily influenced by the actions of his acquaintances, neighbours or relatives. Psychologically, the desire to conform to the behaviour and opinions of others, a fundamental human trait, is what drives such buying behaviour.
So if everybody around is investing in the stock market, the tendency for potential investors is to do the same. Like sheep in a herd, investors in a bull run find it cozy to be inside the herd rather than outside it.
Investors are human, after all. So, the lure of quick wealth is difficult to resist. During a bull run, stock markets offer astonishing returns in a short period of time as compared to other investments. This helps in attracting more money into the stock market.
'There is nothing so disturbing to one's well being and judgement as to see a friend get rich.'
This leads to more people entering the stock market without really understanding the market.
Investors should remember that bubbles are caused by excess cash coming into a particular investment theme.
Thus, investors during a bull run need to be careful and not put all their eggs in one basket. They need to spread their investment across stocks and if possible stay invested in other assets as well.