“The market may be bad, but I slept like a baby last night. I woke up every hour and cried.” Thus goes an old stock market joke.
I’m sure this is what most business channel anchors and experts also imply when they ask you, the investor, to hold your nerves while stock prices are falling.
“Use the crash to invest for the long term,” I heard the analyst say in an interview yesterday.
“The Sensex has crashed. Stocks are hitting new lows,” he said. “The overall mood is that of extreme pessimism. Great! This is just the opportunity that long term investors must look out for!”
“Wow! What a smart man he is,” I would’ve said if I didn’t know the real intention behind his positive outlook.
“But isn’t he really smart?” asked my friend Ravi who came to my house because his cable service provider had stopped showing business channels.
“He’s asking us to invest when prices are falling down,” Ravi continued. “So we can get stocks cheap. Isn’t this a smart thing to do as an investor?”
“Of course it is, Ravi,” I said. “But do you remember what this very guy was saying when the markets had fallen to 17,000?”
“Yes, he had asked us to invest then as well, saying that that was a great time to invest.”
“So you got the point, right?”
“No, what are you trying to say?”
“See, if you don’t buy stocks when the markets are falling, the broker whose analyst advised you to buy stocks, will lose his business. Isn’t it?”
“So what? He’s still talking in my favour. Isn’t it a great time to buy stocks?”
“Well, I don’t know about that, but the fact remains that the same analyst who’s advising you to buy stocks as the markets are falling, must be selling the same stocks to cut his and his clients’ losses!”
“How do you know that?”
“That’s what I’ve seen happening in this industry for the past eight years?”
“Really?”
“Indeed! Every time the markets fall, these experts come on television to advise small, gullible investors to buy stocks, because if these investors recoil in fear and stop buying stocks, how will brokers earn their commissions?
“And behind the curtains, these very experts ask their bigger clients to sell those very stocks so that they (the bigger clients) can cut their losses before the stocks fall further!”
“So what can I, the small investor, do?”
“Well, you can do one thing for sure. Ask your broker – or whoever is advising you to buy stocks just because the markets have fallen to 16,000 or any such level – whether or not he is buying the same stocks on his account as well.
“But Vishal, will the broker tell me the truth?”
“Well Ravi, I don’t guarantee that…but at least you must ask this question. Most investors don’t bother to do that. And since your broker won’t be expecting this question from you, he will fumble, and his body language or his voice will tell you a lot about his real intentions.”
“But the Sensex has fallen to 16,000. Tell me what to do now!”
“Ravi, I don’t think that’s the right question to ask.”
“Is it? So your honour, can you please throw some light on the right question to ask now?”
“Well, the right one is – ‘What should I have done in the past to prepare for an event like today?’”
“And why do you think that this is the right question?”
“Simply because investing is a proactive — not reactive — endeavour.”
“But then, isn’t this a natural human behaviour – being reactive and not proactive?”
“Indeed, it is! You see, most of us are not particularly good at taking charge of our future, our health, our relationships, our career, our finances…our life.
“We tend to spend our life reacting to events, situations and circumstances, rather than creating and shaping them.”
“Vishal, please explain more.”
“See Ravi, we get overweight (and scared)…and then we make a decision to start an exercise program to get healthy (reactive).
“We have a nervous breakdown (and get scared)…and then we decide to manage our stress and cut back on work (reactive).
“We crash our car and nearly kill a child (and get scared)…and then we decide to drive slower and be more responsible (reactive).
“We get caught telling a lie (and get scared)…and then we decide to always say the truth (reactive).
“In the same way, we make wrong investment decisions and almost lose everything in a crash (and get scared)…and then we promise ourselves to be sensible in investing (reactive).”
“Hmmm.”
“You see, taking a corrective action is always a good decision to improve our future…but it all should have been made before reality punches us in the face.
“A life that is based on reactive decisions, largely made out of fear, is never going to be our path to our best life. But that’s what many of us do.
“But then, you see, being reactive is boring, frustrating, painful, and unfulfilling. Being proactive is amazing, rewarding, and challenging.”
“That’s philosophical, Vishal…and thus far from reality.”
“That’s how you look at it Ravi. Everything I tell you isn’t ingrained in stone. I just share what I’ve learned from experience. It’s completely upon you to believe me or rubbish my beliefs. But those are still my beliefs.”
“Okay, peace! Now tell me, Sensex is under 16,000. Is it a great opportunity to buy stocks?”
“I don’t know. But see what the analyst on that business channel is saying!”
“He’s asking me to buy big time. And I think he’s right!”
“His track record doesn’t inspire me…but then, for you my friend, I hope he is right.”
Dear Mr. Vishal,
Nothing could be a better advice than what you had explained. I had gone through this trap and have suffered huge losses, which has almost ruined me financially. I am yet to recover from the impact, but have learned to be patient and trust my own judgement based on logic. One thing is for sure, nobody can predict the right time to buy or sell. But what everyone can do is read into the company’s balance sheet and the past history as much as possible and then take a call. Or the other way is to get into SIP in good quality stocks like L&T or ITC. Over the years the disciplined fixed amount SIP in value averaging (& not quantity averaging) would give returns over a longer term…(I am not even counting the nominal dividend income also that adds up). I had been able make money on L&T by doing SIP, why not others? question is whether people can get over their Greed and Impatience? It’s a call the individual has to take.
Meanwhile, I want to learn the method of understanding a Balance sheet of a company. I am not good in understanding the fundamentals of the financial health of the company by reading a balance sheet. Is there any way I can learn the same?
thanks for reading this far.
Dear Mr. Ghosh,
Thanks a lot for your comment.
Yes you are right in your views. We humans are simply not hardwired for proper behavioral conduct when it comes to investing in stock markets. However, if we can become aware of our limitations as a member of a rarely rational but habitually emotional species, it will change our thought process and get us on the right track of investing success.
As for your question about the way to understand the balance sheet, I hope your subscription to ‘Value Investing for Smart People’ will be helpful. Also, I plan to start writing articles on such topics, and hope they will come in handy for you.
Thanks again for being here.
Regards,
Vishal