Greed and Fear in the Stock Market

Seven ways to conquer greed and fear in the stock market

We humans are bound by impulses. These impulses may stem from various reasons ranging from competitive spirit to curiosity. It’s these impulses which cater to our wants rather than our needs. In one way giving way to our impulses is one of the biggest propellers for economic activities in the world. Credit growth in retail is more or less guided by impulses, almost always. Have you ever wondered why most of the supermarkets keep dairy and fresh groceries at the end of the aisle? This is to make sure we catch all the items available on the shelves, and give in to our impulses, thereby purchasing more items than what we intended. 

So why are we talking about impulses here? Well, it’s mainly because investing is one of the most important areas where we should not give into our impulses. Be it buying, selling or even holding stocks, actions shouldn’t be driven by impulses. And two sins which can induce impulses in investors are greed and fear. The ones who stand the test of time in investing are the ones who have conquered greed and fear. How many times have we been piqued by missed opportunities, resulting in hasty decisions which hurt our long-term goals? Every one of us at some point would’ve given in to these sins and would’ve been adversely affected. Investing is a field which takes no prisoners if we fall prey to fear and greed. 

Let’s take a look at how to cope with and conquer greed and fear with some proven methods: 

There’s no holy grail: 

There’s no one size that fits all. One shouldn’t search for a tailor-made method to tackle investments. What fits one person wouldn’t necessarily fit another. Keeping this in mind, we need to adapt our methodology in arriving at companies to purchase. What works for an infra company needn’t work for another infra company. Hence the parameter that screams buy for a company might be a screaming sell for another. Hence one needs to formulate an approach according to the surroundings, and not let greed and fear be the primary driver of our investment decisions. 

Circle of Competence: 

There’s no telling what would happen if we end up in a domain where we have no expertise. There’s a reason most research houses have dedicated personnel for different sectors. This is to make sure everyone dabbles in their circle of competence. When we were choosing our majors in college, we stuck to one stream. It shouldn’t be any different in investing. We can expand our domain gradually, but it takes time. Rather than trying to know all the sectors, gain expertise in one sector, and then move on to the next one. This helps in building conviction. Conviction is the kryptonite for fear and greed. 

Greed and fear

Markets can stay irrational far longer than we can stay solvent: 

Remember that guy who made a killing in equities with leverage? Yeah, me neither. There are literally proses written about the quality of HUL and ITC. What if one had taken a loan to buy HUL in 2000? There would always be an interest outflow but no price appreciation in the succeeding 8 years. Similar is the case with ITC from 2014. What about taking a leveraged buying decision in Infosys at the peak of the dot com bubble? Needles to say, it would have ended badly. Fear of missing out on action hardly ever ends well. 

Find the purpose: 

Lord Buddha and Adi Shankara were also searching for the purpose of their existence. Not sure whether they found it, but if you don’t find your purpose for investing, you’re not going to exist for long in this field. If you’re looking for a safe 15% returns, stick to that plan and do not chase other scalpers who make higher returns. Your state of mind would be different from others. Our purpose in investing can change with time, and our approach must evolve. Never dabble in this field without purpose, just for the sake of fun, or while being driven by greed. 

Don’t indulge in market folly, profit from it

Market movement are inevitable. Sometimes they move up, sometimes down, and sometimes the only thing that moves would be our patience. But every movement has a reason, even though the cause for the movement could have been irrationality. If you find that any movement is driven by irrationality, you need to use the aforementioned conviction to exploit the situation. For a fundamental investor, if the fundamentals which prompted an investment haven’t changed, there’s no reason to exit. Technical Traders have their parameters which help them take trades. If these have not been violated, they need not exit. Don’t indulge in market folly, profit from it. And this can only happen if your greed and fear are in check.

Automate: 

World is moving towards automation. Use the same in your investments for keeping a track. This helps you cut the screen time. Automate alerts which will keep you posted on the price movements for stocks that you track. This helps in avoiding the noise from the market. Every time you get a stock price alert, check if the parameters still hold for keeping the stock and take a call accordingly. Cut the screen time, cut the clutter. 

Diversify and have a support system: 

Avengers, Justice League, Autobots, or any formidable team achieved their success because of the collective strength of the team. Even Stan Lee had Jack Kirby as a support in building the Marvel Universe. Similarly, your investment should be a group of stocks, that can protect your portfolio. And don’t forget to surround yourself with people who will help you grow. Always be open to different opinions. Working as a team always helps in generating more ideas, reduce confirmation bias, and it’d help put out the rise of greed and fear. 

And just to conclude, Greed and Fear are the two extremely powerful virtues which run in stock markets. They are the core ingredients of the human mind which influence our decisions. But they also weaken our rationality and logic. Once you know how to control them, stock market investing is more enjoyable and rewarding. 

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