Stock Market’s Greed And Fear Cycle

Fear and Greed - These two emotions can cause havoc with our lives as well as our portfolios. Just like the coronavirus, the investor’s emotions of greed and fear are contagious in nature and often lead to the roaring bull markets and subsequent crashes.

Kabhi Greed, Kabhi Fear

Like in a typical Bollywood movie, we saw every bit of emotions in the stock market over the past couple of years. From hope to despair to euphoria. Stock indices swung from record lows to record highs. The one stock market mantra everyone loves is: Buy low and sell high! Yet, few follow this. Why? Because it is too easy to fall victim to our own emotions, succumbing to the fear and greed.

These occasional outbreaks of those two super-contagious diseases - Fear and Greed will forever occur in the investment world. In behavioural finance, this is called the greed & fear cycle. But if you get when to embrace or tame these emotions, a strong position can be created in meeting the financial goals. But let’s first see how they practically influence our minds over money:

When Greed Comes To The Town

Everyone wants to get rich faster. Many investors in the stock market fall into this trap. A perfect example of this can be seen in the internet boom of the late 1990s. At the time, investors were lured by any stock with "dotcom" at the end of it. Then what? Greed took over, more & more buying, unreasonable pushing up of prices, eventually leading to a bubble.

Similarly, recent example can be seen in India as the Bull Run commenced from March 2020. Even though the valuations couldn’t be justified. In fact, a lot of new investors flocked to the markets like never before and many IPOs were launched. At such times, there’s a hunt for stocks that look ‘cheap’ in an otherwise ‘expensive’ market. Everybody seems to be hungry to make up for losses in the past. There is this urge to make quick returns.

When Fear Takes Over

The flip side to the ‘greed’ story are factors that stoke fear. A lot of money starts chasing fewer stocks. Just as the market can become overwhelmed with greed, it can also succumb to fear.

Now if you see in beginning of this year, the Indian markets calibrated concerns about the risks from the Omicron strain and probable speeding of tapering by Fed. Amid worries of high valuations, inflation, and Russia-Ukraine geopolitical driven uncertainties, the sentiment which was greedy earlier switched gears to fear in the past few weeks. Similarly, in the global markets, when the dotcom bubble burst from 2000 to 2002 - stock prices were depressed, everyone panicked and started selling the stocks, leading to a market crash.

Riding the Cycle – Kya Greed Aur Fear Ke Aage Jeet Hai?

You see, it’s a cycle fuelled by herd behaviour - Buying or selling just because everyone else is doing it. This cycle of greed and fear can be observed throughout our market history. Be it the current scenario, the 2008 - subprime crisis, 2000’s Ketan Parekh scandal - where the tech stocks initially moved up, followed by a massive crash and so on.

While we may or may not have control over this cycle, we can learn how to ride it. Everything around us runs in cycles. Be it the karmic cycle, the cycle of creation and destruction of the universe, the day and night cycle, or greed & fear cycle. What we do here is make the most of this repeating cycles. As Warren Buffett says: “Be greedy when others are fearful and fearful when others are greedy.” Did you know? Buffett largely ignored the dotcom bubble and had the last laugh. He didn’t jump onto the bandwagon and held to his principle of buying companies that the market is under-pricing and ignoring the speculative bets.

Maintaining the Balance: Mind Over Money

We saw that markets move in cycles. The best way to make big profits is to catch these cycles early and ride them all the way. The irony is that nobody seems to want to buy stocks when they are cheap. Yet, most people would agree that getting quality goods on sale is awesome!

Think about investing the same way you would buy groceries, clothing or gadgets. Avoid the temptation to buy high, don’t overpay! Greed is good, said Gordan Gekko, a fictional character in the ‘Wall Street’ movie in the 80s. However, a balance of greed and fear is the best approach.

What do you think? Do share your views…

References:

Financial Markets: When Fear and Greed Take Over

How To Avoid The Fear, Hope and Greed Cycle of Buying Stocks