“Do you believe in luck?” Once Raja, my teammate asked me curiously.
“Yes, I do, but only in bad luck. Else how can I explain you about the losses I made in stock market?”
He then asked me, “But, currently we are in a bull market and all stocks are making all-time high.”
“Yeah, but my stock picks always have a inverse correlation in bull markets and 2X positive correlation in bear markets as compared to market returns.”
Listening to this conversation, it might be safe to assume that some (because most of you might not agree due to market highs) of you have experienced the same way similar to my stock market investing journey.
So, the next question that might come to your mind, Why Equity investing is always difficult?
The answer is simple : It’s your Behavior.
The most difficult part of investing is to understand the behavior of the stock markets. It is the crowd behavior that dominates the decision-making and is responsible for the sudden changes in the market directions.
Every time there was a market correction for one or two weeks continuously, we start getting panic and sell the shares as we want to book our profits or cut down our losses. Similarly every time the market rises for one or two weeks, we start buying shares again as we don’t want to become the victims of FOMO.
Let me give you another instance from last March effect. On March 19, 2020, Sensex and Nifty lost over 6% within few minutes of opening bell as investors became extra cautious due to rising number of COVID-19 infections and deaths. Further extending the decline, Sensex and Nifty has lost over 14% in the last 4 days and are around at 28K and 8K. At the end of the month, Nifty fell around 24% in the March alone.
So, What caused this huge fall? Why people dumped all their stocks as if there is no tomorrow?
The reason being there was gloom all around the world. The virus has literally stopped the world with several lock downs. Everyone thought this is going to be another black swan event. In addition to this, all the news channels have been scrolling with news like another recession, global economic crisis and created the panic around the world. As a result, the herd mentality of investors was at work and everyone started selling their shares that caused the markets eventually to crash globally.
Fast forward 12 months later, the Sensex and Nifty were at all-time high, while Sensex crossed 50,000 for the first time and Nifty 15,000.
Out of the 50 stocks in Nifty index, around 12 stocks have more than doubled since then, 15 stocks have gained more than 50 percent and around 18 stocks have gained from 20–50 percent. If you were emotionally strong during the crash and had you bought even any of the nifty stocks or added some more to your portfolio, you would have ended up making a good fortune.
Forget about all other stocks, If you are from Software industry and believe in its future growth, you could have easily doubled your money by investing in any of the IT stocks mentioned below.
But everything makes sense only in hindsight. As Arthur Conan Doyle says,
“It is easy to be wise after the event.”
Understanding the behavioral science is the key to success in the financial markets. It helps you in avoiding the decisions that are driven by your emotions which ultimately leads to the losses in stock markets. Daniel Kahneman, Psychologist and Author of the bestselling book Thinking, Fast and Slow was awarded the Nobel Prize in Economic Sciences for his research on prospect theory, which deals with human judgment and decision-making. Now you can know the significance of Behavioral Science in terms of decision making.
If you want to be successful in your investment journey, you need to ride through the volatility that is often caused by herd mentality.
Let me conclude with what Morgan Housel, Author of the best-selling book The Psychology of Money says :
Being successful in stock market has a little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people. Financial success is not a hard science. It’s a soft skill where how you behave is more important than what you know.
References : Stocks to Riches by Parag Parikh
Originally published at https://vinaythum.com on February 19, 2021.