When it comes to the psychological angle of investing it its either greed or fear. These emotions are the most powerful driving factors of the Financial Markets.
In 1986, in a letter to Berkshire Hathaway shareholders, Warren Buffet penned down his thoughts and pointed out these two emotions as diseases.
Investor behaviour is a ‘continuous vicious cycle’, these emotions are primarily caused by fear and greed and are responsible for the rise of bull markets followed by subsequent crashes in bear markets.
And if you were to trace the bullish and bearish presence it is again the outcome of fear and greed, hence this cycle is continuous and vicious
Fear affecting the market returns
This panic selling is good for nothing.
It causes stock prices and the market to fall sharply.
Ultimately, prices fall to such low levels that stock valuations become attractive (cheap) and the markets eventually bottom.
When asset prices get oversold the market is set to eventually correct itself.
Bearish markets or downtrend markets or crashes can be triggered by a number of factors but the most common factor is a sluggish economy.
During the past market cycles, it has been observed that the stock price fall is comparatively more than the stock price rise.
Understanding the above sentence statistically, your hard earn gains of 2 – 3 years can be wiped off completely in a matter of 2 – 3 months during bear markets, in times of market crash an investor goes from riches to rags in a couple of hours.
A market crash can be a result of a series of events linked together.
For instance, during high leverage through derivatives near bull market peaks, war situations, natural catastrophes, margin calls getting triggered, etc, but note that the root cause of all the reasons is Fear.
When the market dips, prices fall distinctly, and investors start panicking and conclude that the market might fall more.
Stock price moments are based on demand and supply.
In a bear market, the supply of stocks is high since most investors go for panic selling, it is the only reason for the stock prices falling sharply.
Sooner or later, it is observed that the prices fall and start hitting the lower prices consequently which results in a market crash.
And at such low levels that stock valuations become attractive (cheap) and the markets eventually bottom out.
Greed affecting the market returns
Do you one of the harsh facts about getting rich?
Getting rich is simple, the only factor which needs to be kept in mind is that ‘getting rich is a slow process.
But no person on this planet is patient enough to follow this simple process.
Why?
The answer is Greed!
The ultimate essence of investment behaviour lies in Greed.
The only thing continuously running in an investor’s mind is to make profits and get rich quickly.
When the market starts trending, naive investors participate in the markets and start investing without realising whether it is the best time to enter the market or not.
Then there is a higher accumulation phase where, no matter what the conditions and global circumstances the market performs, more and more money in the market is pumped by DII or the FIIs..
The science behind stock prices is understanding the law of demand and supply.
With higher demand or more money, prices keep touching new peaks and the profits multiply.
These growing profits become magnets to attract greedy investors.
At the peaks or highest high, price bubbles are created i.e. the asset/stock which is trading at such peak prices is overbought and the bubble/ the stock is price sensitive and might tremble anytime.
Like all bubbles, stock/asset bubbles eventually burst and nevertheless, prices crash.
The difference between a seasoned investor and a naive investor at this juncture is that a seasoned investor exits the trade while those who are naive and bought stocks at very high prices face huge losses when the market corrects.
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Investor behaviour and market corrections
No one on this planet can control the market but what one can control is their actions.
An investor’s actions at such unprecedented times determine whether an investor makes profits or losses.
This is true for stocks as well as mutual funds.
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There is an interesting fact that Sir Isaac Newton lost almost all of his fortune speculating on one of the hottest stocks in Britain during his time.
The one who could calculate the motions of the heavenly bodies could not calculate the amount of madness amongst people.
Hence, he further quoted, that stock market prices are a collective reflection of the investment behaviour of all investors.
Of which, Fear and Greed form the base instincts.
These instincts drive investment behaviour but they are greatly detrimental to your financial interests.
Therefore, it is never easy to remain calm in highly volatile markets!
The only way to do so is to invest for a long horizon and wait for the compounding magic.
The conclusion here is that, if you let greed and fear affect your investment behaviour then you might not meet your financial goals ever.
We at Jarvis invest with the help of Artificial Intelligence powered emotionless brain work of the principle of completely eradicating fear and greed, making your position stronger and taking you ahead to achieve your financial goals.
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Happy Investing!!
Until next time…