When there is money involved there is always a reason to sensationalise events. Popular culture portrays stock market investors as flamboyant, moving about in their flashy suits and costly cars. Numerous films, books and news reports eulogise them as the ones who made tons of cash. They generally look like the most excited and always on top of the world …though in reality, the ones who made money by investing in the stock market are a minority and almost all of them are unassuming and boring!
Then what causes the excitement…
Bane of liquidity
Dramatizing the practise of stock market investing and drawing parallels to gambling are the two things that haven’t changed since the beginning. This is an unintended consequence of having to report the price of the security every second. Unlike real estate, where you don’t have an option of viewing the prices with such frequency, the process of investing in that asset class remains long term and sticky. However in the case of equities, the luxury of liquidity offered creates the unwanted excitement and leads to several wrong decisions.
Overload of Signals
Most investors are overwhelmed by the signals generated by two institutions who generally act as the primary influencers- Brokers and Media. Majority of the analysts are employed by brokers who are essential to the functioning of financial markets. However, the incentives motivating them are quite different; brokers are encouraged to maximise their commissions from transactions. Hence there is a flood of research reports that are produced by these brokerage houses constantly trying to influence the gullible investor to make the next transaction which would otherwise be unwarranted. Media on the other side, over play, scream and create maximum noise over frivolous news items in a desperate attempt to increase their TRP ratings. Both these institutions may provide the maximum signals and information required for an investor, but it is always prudent to cut through the chaos and take only what is required. Skim the noise for valuable information. This could be difficult initially but you will get used to it soon.
Incongruous timing decisions
When to buy and when to sell are seldom rational decisions. Investors and Fund managers are excited to buy whenever there is a large fund inflow and desperate to sell when there is requirement for cash. The concept of setting aside cash to invest at a more appropriate time is an often overlooked strategy. Hence those who come with a long time horizon, sell in the short term and vice versa. Another important reason for increase in euphoria is the derivative segment and margin trading, which induces high risk with the promise of providing of superlative returns. In such cases margin pressure forces the investor to square off positions, and the blame goes to risk appetites and patience levels. Volatility levels increase and excitement begins!
Excitement is also derived from the numerous fancy stories we hear about how a quick buck can be made from the stock market. Everyone wants to have a go at it without proper planning or guidance. The dream of getting from rags to riches in a short period provides sheer delight even for the ones who cannot afford the risk. They are predominantly lured into investing in small cap stories sighting the higher potential for errors in market pricing. However, such micro and small cap companies also bring along innumerable risks such as improper accounting practices, opaque management, unfavorable levels of liquidity etc. Others look UP for advice…to the so called Market Gurus, or media savvy Fund managers who are invariably committed to raise funds for their own Asset Management Company. They are hence unable to give an unbiased view on the market under any euphoric state even if they intend to do so. Finally towards the end, most of these investors are driven into an unending vortex of losses and bigger losses. They live in a state of denial for a long period and finally end up seeking divine intervention.
“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” – George Soros
Like any asset class, equity also follows a life cycle. To participate in the life cycle we require a rudimentary strategy with a good process which is devoid of any emotion. Any well planned activity is most likely to end in success. Excitement will only lead to unintended and ad-hoc decision making increasing the stress levels causing unnecessary panic.
Keep it simple, Keep it Boring.