Are you making losses in the stock market? Is your portfolio bleeding? Are you feeling trapped? If the answer to the above questions is “Yes” then this article is for you. There are various books on the stock market available in the market. None the less, there are tons of free material available on the internet. You will not be able to earn the profit by just reading these books and articles. There is another factor which decides whether you will earn or lose in the stock market. That factor is our emotions. How we react in various market sentiment will decide whether we will make a profit or lose money. It is imperative to learn the correlation between market sentiment and our emotions to always make the profit from the stock market.
Warren Buffett said:
Be Fearful when others are greedy and greedy when others are fearful
This is the single most powerful statement said by the Warren Buffett. If you understand this statement, I am sure you will never lose money in the stock market. This is the strategy Warren Buffett himself is following since decades.
What is the secret sauce?
Based on the market research by Raymond James, let’s understand the correlation between market sentiment and our emotions. One must understand this before start investing in the stock market. Most of the people start their first bet without knowing this fundamental rule and become the victim of the market cycle.
The strategy is called Fear, Hope & Greed Cycle
Let’s understand the market cycle. As you all know that the stock market goes through various ups and down cycles continuously. Interestingly, our emotions change with the cycle without our knowledge. Let’s look at how?
Market Sentiment:
When the stock market is in the bull phase we become optimist about the market and feels good about our investment.
Emotion: “My decision of investing into the stock market was right”
When the stock market grows further, we become excited and further we think that ” I am getting good returns, let me put some more money”
There are various people like us who think the same and invest in the stock market. When more and more people are investing in the stock market, the market goes up. We are thrilled now with the market’s movement and our profit. We think that we will gonna be super rich soon. I am so smart and intelligent, earning through the stock market is easy and fun.
We tell our family and friends about our success in the stock market. Following us, they also start investing in the stock market. As the end result, the stock market shoots up like a rocket. Everything looks perfect. Everyone is getting good returns. You become an expert in the stock market. Started giving tips to your family and friends. The market will reach new heights. This is called a state of Euphoria.
While you are enjoying the party, this is the point of highest financial risk.
“Intelligent Investors” start offloading their stakes. The price starts to fall down. You are not aware of what is happening in the stock market. you become anxious.
At this time, you will not take any decision and think that this is the small correction and you should not be worried. The market will recover soon.
Few people will become scared and start selling their stocks. The market falls further. You still don’t know why is this happening. You think the market will not fall further and soon it will recover.
Emotion: “The market will not fall further, it will rise again”
The market will not listen to your emotions, and it falls further.
Now you started worrying about your investment. This is the state of fear that we might lose our money. We have invested a lot and still a bit hopeful so we don’t want to book losses and take out our money.
Emotion: “Oh!! it is still falling, what should I do? should I book loss and exit?
The market falls further, we become desperate and want to exit from the stock market. We are in huge losses still want to exit due to fear.
Emotion: “I should exit from the stock market and invest in safer options.”
There are several people like us who are desperate, want to exit the market even in losses. This creates panic in the market.
The market is still falling like a free knife, cutting everything coming its way. By this time the damage is already done, we are in huge losses and we have lost the hope of the market recovery.
We have realized that the stock market is risky and worst investment option in the world.
Emotion: ” I should have not invested in the stock market, I have lost everything, I have burnt my hands and will never invest in the stock market”
We don’t realize that this is the point of maximum financial opportunity.
As we have already burnt our hands, we will not invest in the stock market thinking that the market is not going to recover.
Emotion: “This is just a mirage, The market will fall soon”
The market is recovering. More and more people are investing in the market as it is positive. New people enter the market.
Emotion: ” Let me try again to recover my loss, but this time with lesser risk”
The market is recovering, we are getting profits, but due to fear and past experience of losses, we exit our positions at no profit no loss.
The market moves up further. We lost the opportunity of minting more profit due to our fear.
And the cycle continues……
What is the takeaway?
When the market is moving up we become overconfident that it will never fall again. We invested with herd mentality.
Lesson: This is the time to become “fearful” as everyone is “greedy.” You should exit the market when it’s on the peak rather invest more.
On the other side, when the market is falling and at all time low, we didn’t realize the opportunity for investment. We don’t invest at lows due to fear.
Lesson: This is the time to become real “greedy” as everyone is “fearful”. Grab the opportunity at the low price to gain maximum benefit of the market cycle.
How to know the highs and lows of the market?
No one on this planet can time the market accurately. Hence, nobody can find the best time to invest. However, you should be cautious of the investment you made and altering your portfolio time to time, based on the market sentiment.
To know the stock valuation, one basic and most popular criteria is PE ratio. Check the PE ratio of the stock. Usually, PE around 10 to 15 is the most undervalued and 30+ is the most overvalued. Take your investment decisions based on the stock valuation rather than its current price is the best way to predict the stock price movement.
Further, you should keep rebalancing your portfolio from time to time, based on the market sentiment and price movement. Ideally, in the bull run, you should invest 50% in equity and 50% in debt. Same in the bear run, invest more in equity segment. Increase your equity exposure to 75% to maximize profit.
This is the single one strategy big daddies are using to maximize their profit. This strategy will ensure you earn more profit and reduce loss.