By Lakhwinder Kaur Dhillon
Fear and Greed are two really sturdy primal and instinctual feelings and they are the driving force of stock marketplace movements. The stock marketplace costs are the reflections of collective investment behaviour of all the investors. The investor’s feelings of “greed and fear” are contagious in nature and are accountable for the towering highs in bull marketplace and subsequent crash.
These two feelings are the actual representation of two sides of investment threat as greed represents prepared to take greater threat whilst worry represents acceptable management of threat by recognising it. Being calm when costs are falling and controlled when the costs are soaring heights is not an uncomplicated activity for an investor. Whether a new investor or a seasoned veteran, one frequently battles these two feelings. But if one understands when to embrace or tame these feelings, a sturdy position can be designed in meeting the monetary ambitions.
Greed and the investor
When stock costs are displaying upward trends, more and more investors get involved in purchasing the stocks. As the stock marketplace is governed by the principle of law of demand and is a reflection of investor behaviour, the outcome is dizzying higher in the bull marketplace. High costs instigate the investor to make more earnings and increasing earnings fuels more greed. With higher demand, costs retain increasing additional and so does the profit. Investors get involved in booking quick-term earnings.
At a really higher level of costs, bubbles get designed and as the intrinsic worth of stocks are substantially reduced than the marketplace price tag, at some point the bubble burst and price tag crashes. Investors who invest in stocks at really higher costs following the aggression of the increasing costs (bullish trend) in the marketplace endure enormous losses due to the crash in the marketplace.
Fear and the investor
When the stock marketplace goes via the procedure of correction due to overpricing in the stocks, a downward trend in costs is witnessed. In a falling marketplace (bearish trend), investors get into a panic promoting mode due to their apprehension that the marketplace will fall additional, and the consequence is a sharp fall in the share costs. Investors’ worry of losing all their investment in the falling marketplace leads to aggressive promoting and as the stock marketplace is governed by the principle of demand and provide, the marketplace falls additional.
Two to 3 years’ rise in share costs can get wiped out in just two to 3 months of a bearish trend. When markets are increasing every person desires to come to be wealthy by booking profit and get involved in purchasing. In a falling marketplace, every person begins promoting to minimise their losses due to apprehension of a additional fall in the marketplace. Legendary investor Warren Buffet says, “Be greedy when others are fearful and fearful when others are greedy.” According to him, “no one wants to get rich slowly”. The contagious illness of “Greed and Fear” becomes a mammoth obstruction in the extended-term purpose of wealth creation.
Strategies to tackle greed & worry
Market sentiments can not be controlled but one can manage one’s personal actions. So, recognize the fundamentals behind your investment program, stick to your investment program and steer clear of spontaneous choices seeking at the basic uptrend or downward trend of the marketplace. Respond to the marketplace with reasoning and base your choice on logical and rational principles.
Do not worry the threat of losing your funds in the quick term. Rather, be focused on the extended-term gains based on the view of the organization and financial circumstances. Rationalise your choices based on obtainable data rather than getting guided by greed and worry.
The writer is faculty, Amity Business School, Amity University