Stock markets around the world plummeted Friday, and oil prices dropped to their lowest level in more than a year. Even safe havens such as gold fell sharply.

The main culprit was a growing fear that governments, central banks and finance ministers seem powerless to stop the deepening of a global recession that looks set to crush corporate earnings and lead to deep job losses.

The question on most investors' minds is how to navigate these unprecedented times. To do so, it's necessary to understand the psychology of crowds and how they react in time of panic.

Professionals know that they have to grasp herd mentality and be able to respond to fear, greed and hope. Many investors describe themselves as contrarian investors, meaning they do the opposite of what most market participants are doing. And contrarian investing can be very profitable, if you know what you are doing. However, just being contrarian to go against the market will get you slaughtered.

Trying to go against a major trend in the market or a stock can cost you a tremendous amount of money. This happened in the late 1990's when stocks were becoming very overvalued. Many fundamental and value investors started shorting the market, expecting it to drop.

The problem with an overvalued or undervalued view is that markets and stocks can move to the extreme before a change actually comes. The investors who shorted too soon lost big because stocks were overvalued for years before the bear market arrived.

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