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Stock market sentiment
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How many times have you read and heard the clinched statement “BUY LOW SELL HIGH”
So what is the catch! Why are people like you and me and many seasoned investors and institutions unable to do that? It looks like a simple formula yet even the trained and highly qualified investors seem unable to execute it.
Scenario number one:
In a Bull Market when every stock is going up and most investors are sitting on substantial profits why don’t they book their profits? Why not take that 50 or 100% gain on your investment and go dancing all the way to your bank? Experts give a one word the answer “GREED”. I would like to add another one called “PRIDE”.
Greed sets in and people believe that the Stock market and their stock is going to appreciate much more and rather than looking at the scenario rationally they lose themselves in their day dreams.
Investors start thinking of that flashy new car or house or how impressed their friends and relatives are going to be when they whiz past them in the new convertible. In the process they lose perspective and keep hanging on to their stock till one fine day the stock markets start correcting due to one reason or another. Now they find themselves unable to sell because they some how insanely believe that their stocks' price will go back to the recent highs it made.
The pride factor sets in and they are unable to believe that they are not the smart enough to know when to sell. They also sincerely believe that if they will be able sell the shares at its highest point. Eventually when the stock price corrects to levels below their purchase price they cling on hoping that it will one day again touch the same old highs with a firm promise to themselves that this time they will exit when they are in profit.
Even if the stock price rises again they repeat the same mistake again and don’t sell hoping for higher an higher gains.
Scenario number two:
In a Bear Market when stock prices are sweeping the floors why don’t investors buy that scrip they had been eying for a long long time? This time around the underlying emotion is “FEAR”.
Investors are afraid to make fresh investments thinking that markets are going to find new lows. No one wants to catch the falling knife. Even when stock prices become extremely attractive people fear they will slide further.
Eventually when markets start consolidating and gradually moving up people believe that the up move will not sustain and the markets will fall again. They expect to make their purchase at the lower levels they had witnessed recently. By the time they realize that the markets are really in an up move they have lost yet another opportunity to buy.
Pride plays an important role in both the scenarios. We don’t want to be the ones who bought at a higher price than others or sold at a lower price than others. No one and I mean no one can catch the top or the bottom of the stock market. A sensible investor has the courage to buy when no one else is buying and sells when others are frantically buying.
This is the simple yet difficult to implement formula of making money in the stock market. Those who follow this mantra end up making hefty gains and laugh all the way to the bank. |
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