‘A short quiz: If you are going to buy a car from time to time but are not an auto manufacturer, would you prefer higher or lower car prices? The question, of course, answers itself.
If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong.
Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the item they will soon be buying. Doesn’t this seem strange? Only those who will be sellers of equities in the near future should be happy at seeing stocks rise.
These are not my words, but those of the legendary investor Warren Buffett, and taken from his 1997 letter to the Berkshire Hathaway shareholders.
As human beings, we are emotional and this trickles to ourstyle as well. When equity markets move up, there is a sense of excitement and euphoria. And when it corrects, initial denial gives way to fear and panic.
This is despite the fact that a falling market might give us an opportunity (as mentioned by Buffett) to accelerate progress towards our financial goals.
How to do we live through this emotional roller coaster?
Go for a Bear hug
The first thing you can attempt is to stop hating the bear. Bulls and bears are part of the market jungle. Moreover, bears often check-in with a purpose. In 1992, it exposed the securities scam. In the 2000 crash, it pricked the internet bubble and uncovered the fallacy of the dot com valuations. In 2008, it laid bare the dangers of financial leverage. And more importantly, put an end to the herd mentality.
In an extended bull market (2003-2008), one tends to get too optimistic about the economy and markets. In such situations, bear phases are a great leveller. “Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria,” saidguru Sir John Templeton.
Now, it’s the fear of the consequences of the Coronavirus pandemic that brought the bears back on Dalal Street. In the process, it has brought market valuations back to the ground.
Ups and downs are part of the market and the more you know it, the better you feel about it.
Read your emotions
How do you feel when you wake up in the morning to notice stock indices in the red? Does a Rs 100 loss seem twice as painful as compared to a Rs 100 gain? Perhaps you are in for ‘loss aversion’.
Or is it the ‘recency bias’ that’s engulfed you, as you draw conclusions about future returns offrom the recent past? The recent fall has lowered performance of most . Remember, in the long run, equity returns will revert to its mean.
Or maybe you followed the herd and went overboard. Understand your emotions and acknowledge the mistakes you made.
Interestingly, the parts of the brain associated with expecting and anticipating a reward, are less active in the minds of those who meditate. So sit in a lotus position and meditate whenever there is market noise. It can help you separate your ego from the market realities.
Nothing in this world is permanent. This too shall pass.
Moreover, it is only in a bear phase does an investor really understand asset allocation. Often, decisions on asset allocations are taken when there is market frenzy. And when the market corrects, it becomes clear, if one has gone overboard.
Market – a great teacher
Moreover, it is only in a bear phase does an investor really understand. Often, decisions on asset allocations are taken when there is market frenzy. And when the market corrects, it becomes clear, if one has gone overboard.
In such cases, a midway course correction is far better than doing nothing at all.
The equity market has always rewarded long-term investors while punishing the myopic ones. By staying through the bear phase, it’s likely that you might be convinced of the long-term nature of equities.
A bear phase in the market will dent your portfolio, but only temporarily if you learn from your mistakes.