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Equity Markets And Investor Psychology Anxiety to be in the stock market now seems to be at its peak. Investors want to buy into Equity Mutual Funds and midcap stocks which are rallying since last few weeks. Investors are ready to take on short term correction promising that they are long term investors. Good that Indian investor is now much more brave & thinking long term. I hope if & when markets correct, these investors continue to invest more at lower prices. But normally what happens is different. In my 11 years of experience when the markets correct, 80% of investors don’t buy & another 10% investors actually offload their equity investments. So my experience says 90% investors are momentum investors who follow market trends & fall prey to Greed-Panic syndrome. Only 10% investors actually are long-term investors who invest heavily only when risk-return ratio is favorable and show immense patience & restrict themselves from buying when markets are heated up. Long term investing actually means buying quality stocks after deep understanding of the company’s business model and accumulating that stock regularly and confidently buying more during correction phase. But in times like today, the definition of long term investing is nothing but – ‘buying midcap stocks following the momentum seen over past 2 months’. Many investors have bought several midcap stocks in Oct-Nov’07 between 19000-20000 levels considering it as their long-term investments. In most cases it might be just momentum buying unable to resist the lure of ‘Get-Rich-Quick’. A momentum investor can be distinguished from a genuine long term investor on basis of following two questions: 1. If an investor has bought a specific stock at 19000 levels when it had almost doubled in past 3 months just before he bought it, why did he not buy it 3 months ago at 15000 levels when it was quoting at just half the price? 2. Has he bought the said stock just because it was recommended in newspapers/TV channels or because he has spent at least few hours studying its fundamentals – its promoters, last few years sales and profitability, its products, its competitors strengths, future plans etc. But sadly for most investors, picking a stock is less than 30 minute exercise – just seeing its traded volume, last few weeks momentum growth in price, PE, 52 wk H/L, buys recommendation in financial magazines or probably just a hot market tip. Standard economic theory starts with a flawed basic premise – the investor is a rational being who will always act to maximize has fiscal gain. But, we are not rational beings; we are human beings. An integral part of this humanness is the emotion within us. Our emotions define us and make life worth living. Indeed, we make most of our life’s decisions on purely emotional considerations. Our logic and rationale only retrospectively justify these decisions, they do not determine them. Frequently, emotions prompt us to make decisions that may not be in our rational financial interest. |
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