Investor Psychology vis-a-vis Market Movements

There are no market geniuses. Just those savvy in controlling their emotions. You can never get wealthy if you let emotion get the better of you. But if you rein in your impulses, you have a very good shot to accumulate wealth.

When the market is bullish, everyone is on an investing spree. Along comes the inevitable correction, and those very funds are kicked to the curb. What has changed? Just sentiment.

If the market falls on a certain day, fear dominates and investors are reluctant to invest. Once the market bounces back, greed takes over. Ironically is, investors perceive an investment to be more risky when nobody is buying and the price (NAV) is low, and less risky when everyone is buying and the price (NAV) is high. Laughable isn't it?

How does one counter the impulse to act? Give thought to your Investment.

Value investing is about buying a stock or fund quoting less than its intrinsic value. If you make a purchase higher than its intrinsic value, you are looking at the greater fool theory to come into play -- that someone would buy it again from you enabling you to make a profit.

There is a difference between value in use and value in exchange. Water is an essential commodity which has got a fantastic value in use, but not many people will give you any money for it. And value in exchange is something like a diamond; it may not be useful to you. If someone is dying, it would be more useful to offer them water than a diamond. But the diamond has got a tremendous amount of exchange value.

So, for example, a good stock/fund may not have pricing power, but will have fantastic value in use. If you think those stocks/funds will be able to make phenomenal profits over time, you could be wrong. Simply because there are certain constraints on how much power can be priced.

Ensure you

1. Understand the business you are investing in.
2. Check for credible management that treats its minority shareholders well.
3. Look for a strong moat and pricing power.
4. Think when you sell/redeem.

value investor’s basic investing philosophy is based on the “law of the farm”. The laws made by men can change and are manipulative in nature. For example, you short sell and you make money, you buy futures and options and you make money. You give an Upfront Commission (pass ba k) and you get more clients. These are all short-term manipulative practices.

On the other hand, the laws of God are universal principals. One of them is the ‘law of the farm’. You cannot sow something today and reap tomorrow. A seed has to go through different seasons, before it turns into a tree and starts bearing fruit.

Same with value investing. Waiting is part and parcel of the game. Incidentally, it is the most difficult part. You can do your research well and invest in a great fund, but it will be an exercise in futility unless you have a long-term view. Imagine growing grass. You water the ground every single day. You won’t see shoots instantly, but over time you will have a garden.

Ask yourself why you are in a hurry to sell/redeem:

1. Do I urgently need the money right now?
2. Is my rationale for investing in the fund still sound?
3. Will the current developments have any negative bearing on thestock's/fund's future earnings? Let’s say we are faced with a scenario where crude oil prices touched $100/barrel. Analyse how this would impact the company’s/fund's bottom line. Do you foresee this rise as a blip due to geopolitical turmoil and see it stabilizing soon?
4. Is the market overreacting to one quarter's dismal performance?
5. What is my research telling me? Is it compatible with what the management is stating?

If you are convinced that holding on to the stock/fund is the right thing to do, you could even look at the possibility of purchasing more in the event of a considerable fall in price. If you picked it due to some “tip” or purely as a speculative play, you might as well sell. If not for a profit, at least for peace of mind.

Nothing lasts forever. A bull phase is followed by a bear phase. Maintain your equanimity in the market.

To know more about Investor psychology and market movements, kindly contact Jayant Harde on 9373284136 or +91 7122282029. You can also visit our website: www.jayantharde.com