The Indian stock markets are swaddled in various ups and downs before the volatility sojourns in a comfort zone in times of a prolonged bear or bull-run. It is noteworthy to observe the paradoxical pattern in the stock markets where every buyer wants to long scripts at a minimal price and every seller wishes to short scripts at the best possible price. In times of inflationary period, we fear the risk of losing the money whereas, in times of deflationary runs, we fear the risk of missing opportunities to enter the markets. Such emotions cloud our rational decision making and avert us from taking actions based on logical reasoning.
Many times, investors transact in the Indian stock markets in greed, anxiety, excitement and fear; due to which he may have to bear losses. Investors tend to associate hoodoo with the stock markets, however, it is not the stock market, but his own emotions which prevent him from making smart decisions.
Markets undergo various cycles and investors react to these fluctuations in various ways.
The Trading psychology is a range of investors emotions which makes them react differently to the market fluctuations while investing.
Optimism: The desire to make money encourages investors to enter the stock markets. In this stage, he is highly optimistic about the gains associated with the stock markets.
Excitement: The investments turn profitable and they get further motivated to invest more in the markets.
Thrill: ‘Wow!’ Yes, that’s what an investor think when their investments start giving positive yields. They share this with their friends and family and even don’t mind pampering them with a treat to share their exuberance.
Euphoria: Here, an investor is on cloud nine. This point marks the maximum financial risk along with the maximum financial gain. With the quick and easy profits, they tend to ignore the investment risks and become overconfident. They tend to trade frequently based on intuition, basic research, hear-says or media commentaries in order to earn that extra buck.
Anxiety: ‘Ohh No’, ‘This can’t happen’, ‘Oh my god’ are the first words on noticing that the stock market investments are taking a downward turn. At this stage, investor is still optimistic and think that it’s better to stay invested.
Denial: The bear run seems to be not giving up. They think, ‘This doesn’t matter. I am a long-term investor. The markets will recover.’ With the hope of improvement, they stay invested. The panic mode has still not engulfed them completely.
Fear: Here, an investor gets a reality check. The state of confusion swamps them and they are completely clueless about their investments. They call their fund manager, broker to discuss the concerns. They stay upset and prefer to stay glued to the TV screens to check the prices of the stocks.
Desperation: The name itself says a lot about the investor’s mental state. He is clueless, irritated and desperate to earn profits. He is ready to take stock ideas from anyone in order to mitigate the losses. For some reason, they are still ready to hold their investments. They start praying and think that uptick in the stock prices is still possible.
Panic: ‘I should have researched more’, ‘I should not have listened to my neighbour’ are the thoughts that come to their mind. The bear run continues and with this, the state of panic intensifies.
Capitulation: In this stage, an investor consider selling all their stocks, even if they have to bear losses. Their friends and family with whom you shared their excitement at one point of time, are now worried about their distress state. They start thinking that stock market is not their cup of tea.
Despondent: Finally, they put their foot down and sell all their investments at enormous losses. They are sceptical of investing in new good opportunities and choose to stay away from equities. The moment their friend or family talks about the stock market investments, they think it’s the time to run away from that conversation.
Depression: They missed the opportunity of making profits and regret being stupid before. Few investors start introspecting by looking back at what went wrong. After having learned a new investing lesson, they start identifying and analysing new opportunities.
Hope: Markets continue to rally and this time, investor carefully invest in few stocks.
Relief: The Indian stock markets regain its lost glory and investor start making profits. The faith is re-established and they start considering buying more stocks. From here, the circle starts again.
Having learned the various emotions, the obvious question of any investor is: How I cannot allow my emotions deter my profits?
How Can You Keep A Tab On Your Emotions?
The first step towards putting a knob on your emotions is by acknowledging them. You can forbear yourself from the serpentine emotional roller coaster ride once you start being familiar with your emotions.
The question for many is: How to realize that your sentiments are obstructing on your way towards successful investing?
- Impulsive Decision: You immediately react on the stock prices. For e.g. if a stock price plummets by few penny, you immediately sell the stock.
- You take unrealized gains/losses seriously: Unrealized gains/losses are the profits/losses if you were to sell a particular stock at a particular moment. For e.g. you purchased stock XYZ at a price of INR 50 and the stock dipped to INR 42. If this fall in the stock price badgers you a lot, you are an emotional investor. In a similar way, if you celebrate the surge in stock prices, you are an emotional investor.
- You check stock news frequently: If you are fixated to the stock news all the time, then it is an alarming bell.
- You call your broker on a frequent basis: If you panic at any market news and call your broker out of anxiety and fear frequently, then you are a victim of emotional behaviour.
How Can You Safeguard Yourself From This Pitfall?
- Meditation: This is an evergreen way to control your emotions.
- Don’t trade. Buy businesses: Warren Buffett once said, “If you are not willing to own a stock for 10 years, do not think about owning it for 10 minutes.”
- Introspection is a key to learn from past mistakes.
- Past performance doesn’t tell anything about the future performance: Many investors don’t study the fundamentals of a stock and purchase stocks purely on the basis of the past trends.
- Timing the markets: The focus should be on buying quality businesses rather than predicting the market movement in the future.
- Rebalancing your portfolio on a periodic basis: Stock markets fluctuate on a daily basis, and this demands periodic reviewing of your portfolio.
It is difficult to control one’s emotions and that’s why the role of the financial advisor is becoming increasingly crucial. They help you to see the reality and direct you towards the route of rational and logical investing.