XOXO : Investor emotions — from hugs to kisses and everything in between

When we look at that black screen on god forsaken channel that we rarely watch, and the red and green graphs scream “Sensex”, “Nifty” and “markets”, we assume it is all but technical and therefore too boring or too intimidating.

And so we move on to watch something else. Never mind if it is something as lame as Roadies! But anything other than the finance and markets is bearable.

I feel you.

But the thing we miss out on is that markets are made of people, buying and selling stocks. People are prone to emotions. Yes there are technicals, but a force stronger than numbers that play in markets on frontfoot are emotions.

I went through this cycle of emotions unknowingly when I invested in stocks initially, which I have documented here.

And then I stumbled upon this actual study that has plotted investor emotions to depict a cyclical process. I present to you my version.

The roller coaster

Optimism : You identify a stock that looks like it is going up steadily. It catches your eye and you are optimistic. You start tracking it.

Excitement : The price has gone further up and now you are excited. You decide to buy the next time it falls even slightly. You are all ready to make the buy any moment.

Thrill : You decide you can’t wait any more. The FOMO (Fear Of Missing Out) is setting in. You have already lost some initial profit from the first time you spotted it. Not any more. You go ahead and buy it. You decide to sell it if it falls below current levels(stop loss).

Euphoria : The stock has made a run and you can’t wait to see how far up will it go.

Anxiety : Okay, it did not go up. It has slid down a little. And you think, “maybe this is temporary and a good opportunity to buy more. Because clearly the stock HAS TO go up.” And so you buy more.

Denial : “Okay, it has crossed my stop loss(the lowest level at which you were to sell it) but it can’t really be going down. Most certainly an opportunity to lower my cost. Let’s buy a little more and when it goes even a little up to ‘Anxiety’ levels, I will sell it off. Promise.

Fear : WTF!

Desperation : “This has to be the bottom-est it reaches. Am I dreaming?”

Panic :Can’t buy, can’t sell. What should I do?”

Capitulation : and it goes further down! “Can’t believe you stock! You did this to me. I am definitely getting out, but so much loss!

Despondency : “Why did I buy you in the first place? How did I make a wrong decision? I really cannot go this wrong!” The emotional built up at this stage makes you sell the stocks to avoid further loss.

Depression : Having made a huge loss, you are dejected and feel the stock market is not for you. This combined with the market slowly trying to move up makes you more fearful of impending fall.

Hope : The markets start moving up and you realise that the fall is not a finality in markets. That there is a possibility that markets recover again. But you would rather wait and watch.

Relief : The markets do move up and you saw the cyclical nature in markets. You are relieved and start looking for new opportunities.

Optimism : You identify a stock that looks like it is going up steadily. It catches your eye and you are optimistic. You start tracking it.

Taming your emotions

The market has lakhs and lakhs of investors going through this cycle. The Euphoria makes us overconfident and we feel there is only one way from here and that goes up. And depression does the opposite.

So investors tend to buy at the highest and sell at the lowest.

But now you know. The highest is the point of maximum risk and the lowest is the point of maximum opportunity.

The task is to not give in to the emotions.

“But how do I know the top and the bottom?

You don’t. Neither do I. That’s why there are experts.

To be fair, even they don’t know for sure but they at least know how to read the markets. Plus they know technicals, the other part that is playing it’s part in market cycles.

“Then why do you and I need to know this?”

Because when the market goes through cycles, you and I are the first people to panic and call our advisors!

It is important to understand the emotion you are feeling and look at it in context of market cycles and not in isolation.

It is all psychology and behavioural finance is actually a thing.

The concept is simple, when you hit the bottom, that is when there is only one way out. And that only takes you up.

Cut your losses and exit a lost cause.

And when all looks lost, that may be the biggest opportunity.

But why the hearts?

Because I felt the journey of falling in love, heartbreak, depression and finding new love follows the same cycle. But what is better is that once you find your person, you can look forward to a life full of excitement, thrill and euphoria, with a bit of anxiety. But nothing worse.

So using this to give hope to someone who is depressed.

You, my dear, are at the point of maximum opportunity.


Originally published at She Talk Cents.

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