Stock market is a play of emotions and judgement, with a forward looking approach. However, in stock market play, Emotional Quotient(EQ) is more important than one’s Intelligent Quotient (IQ). The EQ helps investors stay cool and calm, and rational during market ups and downs, preventing impulsive decisions driven by fear and greed. The three important emotions and sentiments that affect success as also failure, in the stock market, are fear, greed and a compelling feeling of regret. The best way to win over such emotions is to keep cool with well thought of occasional profit booking! Indeed patience is the watchword and a Guru Mantra! Let us understand how all these factors pave the way for success in the stock market!
One of the foremost problems impacting success in equities is greed. Quite often when a stock is consistently on an upward price trend, one might feel that the price will keep on moving uninterrupted, and thus sit tight! Also gauzing a rising trend one might go for bulk buy in one go, out of greed for a rich harvest soon! If that was so, everybody could have become a millionaire in a short span! Infact, one should set a logical target for purchase or sale of a stock, and once it reaches, seeing the market trend of course, one should act. Else undue greed to hold back or to buy lump sum in haste, may be painful and a matter of regret either way. In fact, the reality is that the stock market never moves linearly in one direction for long. So, it is one’s logical and watchful judgment that proves rewarding, rather than hasty greedy action!
Risk, unpredictability, uncertainty and volatility which manifest fear, are a norm in the stock market, rather than an exception! Therefore, one must take such events in a stride with patience and keeping cool, else it could be killing! More often the traders and players in derivatives succumb to these effects more commonly and easily, because of some inherent element of speculation involved in these acts. Therefore, it is necessary to understand oneself whether you are an investor or a trader! As a thumb rule risk and element of risk is relatively less in mutual funds and in dealings as an investor. The biggest fear is seen coupled with sharp decline or crash in the market, in general, and in respect of day traders and players in derivatives. As a result, out of fear, in a certain situation, one may rush to lighten their portfolio, even at a huge loss. That is not the right approach. In fact the period of sluggishness or crash, as happened during the Corona pandemic period, is the time for investment in quality stocks or at best remain calm and neutral, as an investor, rather than for panic and fearful selling! Some also fear from the day to day volatility or on the basis of an unexpected negative news, and rush to sell their holding! Such a situation calls for cool and calm, to observe the situation for sometime, for a desirable action, before any action!
In the stock market, regrets are likely to come up in several ways! One may regret having not applied for an IPO, which shows magnificent listing gains, or to buy a post IPO or FPO very soon. Another prominent regret is seeing a boost in the price of a stock after you have sold it. Regret of losing out an opportunity of buying or selling your favorite stock, at an opportune time, from the secondary market, i.e., a feeling of being left out, is another major cause of regret. For these and any other cause of regret, one must remember that there is no dearth of opportunities in the stock market. This is because, stock market never moves in one direction for too long, and also nobody could judge when and to what extent it will revert. One price which has been exhibiting a bullish trend of a stock sooner or later often shows a bearish trend also, may be for some time, offering opportunity to buy a missed out stock, and vice-versa. Probably the best way to minimize regrets is to look forward, and not look back! Also it is desirable to consider your holding and its value in totality, rather than piecemeal –stock by stock!
It is desirable to judge and evaluate a tip, news or a rumour, rather than hastening to act, i.e., rushing to grab instantly to buy or sell, blindly! This calls for wait and watch, to evaluate and understand the value of the tip or recommendation for a stock, before buying or selling a stock, keeping cool. One must evaluate and ascertain the worth of news or a recommendation, keeping credibility of the source in mind, before action. Once you arrived at a favourable feeling, it may be helpful to act! Thus avoid impulsive and hasty buying or selling a stock.
Impulsive buying, and for that matter selling too, implies immediate and intense buying just hearing a tip or a news! Often such an impulsive buying or selling doesn’t prove beneficial. Sometimes it leads to big losses, because of likely intense volatility in prices soon afterwards! Therefore, it is better to judge and understand the tip or the news before acting.
Dealing in the stock market with borrowed money could be doubly harmful. Thus do avoid investing in equities with borrowed money!
Occasional profit booking- the lease of life for a productive long term play:
Occasional profit booking witnessing the market trend should be a must, for safety and due wealth creation! Also, while profit booking, especially for a favorite and a promising stock, as per your own understanding and judgment, don’t sell the entire holding! This helps in two ways! One, as a matter of safety and wealth creation, and secondly to minimise the cost of holding as also to expand one’s portfolio with minimum investment!
Pick up and invest in quality stocks, in smaller lots, by adopting SIP plan! The same holds true while selling a stock. Also it may be worthwhile not to offload full holding of your favourite stock, in one go. Better to retain some portion of your holding, to encash the ensuing bullish trend, if any, subsequently.
Give due consideration to add high dividend yielding stocks to your portfolio!
Spending time in the market:
Don’t try to time entry or exit from a stock, but do spend time in the market for better understanding of investment. Nobody has ever been successful to time the market and events! Stock market indeed is a play of news and knowledge! Better you know , better could be your success rate in the stock market! The better way is to remain in touch with the market and to the flow of information! Nonetheless it doesn’t imply remaining sticking to the screen all the time!
Best friend of an investor in equities is to have patience avoiding undue haste in action. Keeping cool is the watchword and key to success in the stock market!
The author is a Blogger and former employee with the Government of India
DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.