Perceived Risk and Human Nature
The greatest opportunities in the market, on both sides, occur when there is a large gap between the actual risks to the market and the perception of those risks by market participants. For example, in 2007, as the sub-prime lending crisis grew, very few people saw those risks and the market dramatically underestimated those risks. This dichotomy allowed for the greatest shorting opportunity in generations. As always, the perception of risk moves like a pendulum, so as the actual risks came to fruition and were addressed, the fears and perception of risk moved to an extremely negative stance, thereby creating a great buying opportunity only a year later.