Letter to a fellow Investor- Monetize Your Fear

Hi,

Fellow Investor,

How was your last trading day?!!

I mean how is the experience of high Stock Market Volatility that we are facing currently?!!  This current scenario of the market has surely aroused confusions in our minds, which is very normal.

Keep calm and invest on is sound investment advice, but your fears often get in your financial way, especially when markets decline.

During this time of High volatility, you might have obtained advices from various sources- media, friend or a person whom you regard as an expert. The Crux of most of those financial advices being – “Stick to your investment plan.” Very easy to say and understand too, but most difficult to remember and implement during 11am-3pm!! Isnt it?!!!!

If our financial house is on fire, we want to fight the flames or flee as surely as if our actual home were ablaze, behavioral finance experts say. To stand back, watch and periodically throw more money on the bonfire is tough even for the most seasoned investor, let alone for you and me.

So what to do next?

I was surfing the internet and found some useful info and tips on an investment page, thought it to be relevant in this time of current market scenario and would like to share it with you. It says-

“You can be smarter than your emotions, but that’s an acquired skill.”

Here are some ways to sidestep the natural emotional triggers that can be costly during the next market correction or crash (not sure what it is!!):

1. Beware of ‘market crash Stress Disorder’:

Market corrections and recessions are inevitable, but there’s no reason to expect that a downturn of huge magnitude is right around the corner. You or no one can predict how down or up the market shall go. Selling your stocks based on the rumor that the prices will go down further during this volatile period is like hitting axe on own leg.

2. Ignore your portfolio’s peak:

Humans are hardwired to feel drops in portfolio value more than equivalent gains, a phenomenon known as “loss aversion.” So when you see the value of assets below their peak, the urge is to make moves to stanch the loss by selling. But really, the smarter thing to do would be to hold — or even to purchase some more of these beaten-up stocks, a practice known as buying the dip.

“You need to look where you are at now versus where you started — don’t look at your peak. If you look and see, ‘I’m down 2%,’ that’s the wrong perception.

“Look how much your portfolio has grown since you started — keep that in perspective.” 

3. Tune out financial news, panicky ads:

When market drop, wall-to-wall coverage by some of the financial medias create a sense of impending doom. You’d think the world is ending.

Nowadays, social media and news organizations have really figured out how to tease your “amygdale”- the region of the brain that triggers the fight-or-flight response in humans!!

There’s always gonna be something touting like- ‘The guy who predicted that is now saying this’ — or to buy gold, or some guy’s stock-trading newsletter,” .That’s what gets you to make the emotional, fearful decision to do something different and go off your plan. In many cases, you screw up and get hurt and it’s hard to rebound.

Thus, to protect your portfolio — and your sanity — it is recommended not watching daily moves, but instead checking in monthly, quarterly or annually.

4. Keep Cash In the Market Itself:

You may be wondering, “how long will this last?” It’s almost like a constant run of good luck at the gambling table and it’s eventually going to turn on you. During this volatility period, you might think that the day you invest, their might be further correction and you may incur loss. I cant guarantee the upside or downside.

But remember that-During periods of volatility, in the long term it can pay to keep calm and invest on. So do some fundamental analysis and stay invested in the right stocks instead of just focusing on the hot stocks during this period.

5. Buying the Dip Strategy:

The buying the dip strategy is as simple as it is logical.

“The shares have been purchased at a discounted price, less than their true value – usually due to being oversold – and this is now the optimal time to invest.”

This is of course due to an expectation of an upswing that will bring it back to the ‘normal’ price or beyond.

It has been a successful and popular strategy for years and has been continually endorsed by Warren Buffet.

Currently, there are few stocks which are Underpriced i.e. trading below their fair value. So spend some time analyzing the Last Quarterly Reports and you would surely find where to invest and stay invested!!!

ITS TIME TO---“MONETIZE YOUR FEAR”

Finally, some words of Wisdom from the Guru Warren Buffet-

Hope that this letter gives you a head start like it did to me and if you stop panicking and think the fundamentals before making whatever decisions you want to make, the objective of this letter is fulfilled!!!

Looking forward to meeting you on the next trading day!!

Till then, Good bye and take care!!

CA Ayush Khetan (ayushkhetan2007@gmail.com)