Thursday, Aug 18, 2022
Outlook Money

Skip Fear And Greed; Listen To Reason When Investing In Equity Market

Stock market investing requires patience and perseverance in stock selection and staying steady during volatility

Equity Market

In the words of philosopher Bertrand Russell, to conquer fear is the beginning of wisdom. Indeed, fear and greed can play spoilsport in equity decision-making. How an investor controls her emotions governs the success or failure of her dealings. The higher the fear and/or greed, higher would be the sense of insecurity, and vice versa.  

Stock market investing requires the patience and perseverance of a parent. One’s child will grow and prosper with time; expecting a quick growth through short cuts does not work. Prudent thinking and patience is the key to success in stock market.  

The Fear Factors 

Fear of being left out: The kind of returns that equities gave during 2021 is a rare experience. Share prices of some primary stocks (IPO stocks) as well as of several secondary market stocks increased in leaps and bounds in just a few days. In such a situation, the fear of being left out promoted new and small investors to buy any and every stock even though they were at peak prices. This proved to be a trap for many.  

In only a few days, the share prices of certain primary equities (IPO stocks) as well as numerous secondary market stocks surged by leaps and bounds.

The mantra for success in the stock market is: watch, wait and act appropriately with conviction. 

Fear of heavy losses: Once one has bought a stock at its peak price out of fear, the temptation is to cut losses and sell the stock during even a momentary dip when the price may be unreasonably low. However, such a situation calls for prudent thinking and patience. One must watch the stock movement and take a decision at the right time rather than panic selling. 

Fear of being stuck with dead stocks: A steep fall in stock prices doesn’t mean end of the game for that stock. Such a situation calls for cautious analysis and careful judgment—to cull the stocks or buy value stocks on dips. 

Impatience in buying or selling a stock: Sharp volatility in the market is not something to fear, and as a result take rash decisions that lead to instant buying or selling. The situation may provide an opportunity to pick desirable stocks.  

Market crash syndrome: This is one of the greatest fears in the minds of investors, especially small investors. Such a situation leads to panic selling, fearing havoc. It may be a dooms day but not the death day for the market. Markets see occasional ups and downs. So, a sudden dip in the stock market, especially of a growing economy like India, should be treated as an opportunity to pick fundamentally strong stocks, rather than to exit. 

Market crash
Market crash .

The Greed Factors 

Making a quick buck: Unprecedented gains from equities during 2021 proved alluring for a large number of investors. But wishing for overnight gains, from whatever stock, is unrealistic. This is a sign of greed and the wish to make a quick buck.  

Easy gains: People who invest to get easy gains, are largely disappointed. Getting suitably high returns from equity happens only when a studied investment is made. 

Holding a stock for too long: If planning to make a quick buck is not advisable, then neither is sitting back and holding a stock, hoping for high gains. In view of day-to-day uncertainty and volatility in stock markets, and information about the company, an occasional review of one’s holdings is desirable.  

Relying blindly on past performance: Buying a stock that was once a blue chip and is now available dirt cheap, in the belief that it will bounce back to its earlier glory, can be a mistake. Prudent analysis is a must. 

Trying to time the market: Waiting to buy at an extreme dip or having the urge to sell a stock at its peak price, exhibits overconfidence and greed. Nobody is ever able to time the market, so it is better to keep a range of prices in mind, on the upper and lower side. 

Personal preference: Illogical personal preference for certain stocks because of their very low price, even if they are illiquid, in the hope of making windfall gains is a case of greed. 

Don’t fall prey to fear and greed when it comes to stock investing. Prudence and patience are the keys to success with equities. 

The author is a former employee of the Government of India and has worked in the agriculture sector. 

Disclaimer: Views expressed are the authors’ own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.