Fortune Watch

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No matter how much you’ve read about trading, or how much experience you have as a trader, it is difficult to trade profitably in a volatile market environment like the one we are in now. A rising market is often perceived to reflect optimism and investor faith. Enthusiasm and rejuvenated interest in the markets rides high. Many investors have multiplied their money manifolds.

Now, is it time to quit? Will the bubble burst? The investor has many questions and very few options before him. Strategies for a rising market are crucial and much depends on the risk appetite of the investor.

Don’t sell into the panic. Don’t buy the greed. This is of course obvious to say, but harder to execute when it is actually happening. When you have extreme market conditions, the individual stock movements can be big and rapid, and they are not necessarily, and in fact, usually not at all, related to fundamentals or economics.

Will the upswing continue? This is a difficult question and much depends on the factors that contribute to the bull run. Many perceive the market to be over-heated and fear to set foot in it. Others view corrections as an opportunity to make quick money. But this calls for quick decision-making and considerable tolerance to risk.

The unfailing strategy is to buy great companies with long track records of rising stock prices and dividends. Pick them low and hold on. Over a long haul, such companies with good fundamentals will not fail you. It is not unusual to find some stocks faring poorly in a bull market and some doing exceptionally well in a bear market. A bull run implies a booming economy, low unemployment rate, high production of goods and low inflation.

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Greed and fear are the major players in the stock market. These two emotions are the driving force behind almost all market participants - Institutional mangers, stockbrokers, Investors, traders and yourself.

You might be saying to yourself that greed and fear will never get in the way of my trading, but believe it or not they will be. It is not something to be ashamed of. It is something you have to admit to, come face to face with, If you are to become a successful stock trader or investor.

What do greed and fear look like in the stock market trading arena? “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Warren Buffet

Fear doesn’t form in a vacuum. It is a learned response to a particular event or probability. In the case of trading, when you have a trade that goes bad, the regret and frustration can carry over into the NEXT trade. Or worse, the fear is so consuming, that you don’t enter your next trade. This particular problem is fueled by the expectation that every trade you enter should be profitable. If you truly believe that, then here is an important piece of information for you - not every trade will be profitable!

Greed creates the opposite problem. With a couple of consecutive winning trades, the ego can enlarge and feeling invincible overcomes being logical. This will ultimately lead you to trades that you normally would not have entered.

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Market corrections are inevitable and healthy. Stock market corrections can be excellent opportunities to purchase common stocks at bargain levels. Veteran stock investors are not seeing anything in this turbulent market that is particularly unusual.

The fact that this market roller coaster is being pushed by a credit crunch instead of surging inflation or some other economic disaster doesn’t change the need to take a deep breath and sit tight.

Corrections, pullbacks, or whatever you want to call them are a natural part of the market cycle.

If you take a look at the past, there has never been a correction that has not proven to be a good buying opportunity. It has taken an average of less than three months for the market to make up those corrections, which is why most veterans plan to ride out the bumps.

When the market begins its return to normalcy, you don’t want to be on the sidelines. The secret to wealth has always been to “buy when there’s blood running in the street and sell when everyone is pounding at your door, clawing to own your equities.” You must have enough faith in yourself to buy when the rest of the market is selling.

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“People who read Cosmopolitan magazine are very different from those who do not.” so said Donald Berry in ‘Statistics’.

Now you will just not have any idea of how apt that statement is unless you’ve actually read Cosmopolitan (really read it, not just look at the pictures) but I like to believe that fund investors who read Mutual Fund Insight are very different from those who don’t. I have believed so far that there are two kinds of fund investors-thinking ones and non-thinking ones. And those who invest their time and money in reading this magazine must be the thinking ones.

What distinguishes the two? The non-thinking ones are the ones who just follow whatever seems to be the flavor of the day. The thinking ones are those who carefully weigh their options, consider the facts and then take rational decisions. However, in recent months I have seen that sometimes, the final step is the same.

The non-thinking ones unthinkingly follow the flavor of the day. The thinking ones think carefully, then just ignore the conclusions and follow the flavor of the day. They look at returns, ratings, portfolio statistics and whatnot, but then turn around and invest purely driven by the fear of getting left behind by everyone else.

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I am a bit of a gambler but am not the normal type of punter who you may see in the bookmakers on a Saturday afternoon. I am the kind of gambler who only likes to bet on what you might call a racing certainty. I love the thrill of all things to do with gambling but in my opinion there is nothing better than riding the stock market wave. What I mean by this is attempting to make money from investing in stocks and shares, trying to predict when to buy and sell etc. In this article I will write about the reasons why I believe more people should invest on the stock market.

Some people avoid the stock market because “it’s too risky.” But it can be riskier to not invest. If you put all your savings under your mattress, it probably won’t be enough to sustain you in retirement. If it’s all in a bank account earning 3% per year, on average, then that will barely keep up with inflation, at most. You can do better than that.

Many reasons for many people to do investments, one that can be very common to most of us is to make money. There are also personal reasons that you’ll want to start or join an investment club. You’ll finally have the opportunity to play the stock market in a safe environment that may be low risk and lets you learn more about a subject that greatly interests you.
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It’s a dangerous time for investors when any and every investment makes money. I do realize that I must be sounding like a lunatic when I say that. How can things be dangerous when money is flowing into investors’ account statements as if it grew on trees? And for mutual fund investors, it does appear to be growing on trees. Of course investors in the best funds made an absolutely humongous amount of money.

Something similar has been happening for stock investors as well. Even though there were some stocks that lost money, an overwhelming number of them went up by huge margins. There isn’t really any stock or mutual fund investor out there who didn’t make a great deal of money. Therefore, what we have here is like an examination which everyone clears because the passing marks have been reduced to zero.

These are abnormal times which are very dangerous precisely because it’s impossible to make mistakes. You can invest in bad companies and bad funds and still make money. And that means that when the going gets even slightly tougher, a lot of people will find that they actually did invest in bad companies and in bad funds.

It’s an old saying that more investment mistakes are made in good times than in bad times and since the times are so good right now, the potential for making mistakes is that much higher. Investment markets change direction very quickly. Nothing prevents what look like good investments today from turning out to be bad ones.

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Investing is so fascinating because it’s just as much about people and their emotions as it is about the raw numbers. Sure over the shorter period – and especially over the past 4 years – everyone’s an expert. It’s critical that ALL investors have a sound investment process.

It’s good to be confident, or so all of us were told when we were young. Confidence will make whatever you want achievable. So it must be very good that I’ve been meeting a lot of very confident investors these days. I met a man who started investing in stocks only three months ago and whose investments have returned more than 25 per cent during this period. That’s an annualized return of more than a 100 per cent a year, as he proudly-and accurately-informed me. Someone else I ran into started investing in February 2004 and have more than doubled his money. He has made a very confident projection that showed how fabulously rich he was likely to be in about five years’ time.

Of course, this is not just amateur hour-professional investors too are sounding like the gentlemen above. I met the marketing chief of a mutual fund company who had many megabytes of marvelously entertaining PowerPoint slides about how his fund managers had generated great returns over the last three years. I did ask him about what their returns had been like before that but the response I got made me feel that I had said something very rude.

Welcome to the land of investing geniuses, no one in this world has made any mistake on the stock market for as long as they can remember.

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The pain of investors is enormous. People have lost a lot of money and not only are the losses continuing, but it’s clear to me that they are going to continue. What is worse is that the boom and the hype around it evolved in such a way that the worst pain is faced by those who are least prepared for it.

The worst real losses are those of investors who got attracted to the stock markets around the time when the markets were booming. Typically, these people have made a series of bad choices. Instead of investing steadily, they have put in large chunks of money at one go. Their mutual fund investments are in untested new funds and their stock investments are in rumor-of-the-day type of stocks that were being pushed by brokers. The more recklessly adventurous have already lost large chunks of their investments to repeated margin calls from brokers and lenders.

Of course, the question that everyone is asking is when will the markets turn upwards and resume what we’ve come to believe is their normal course. After all, as the logic goes, there is nothing wrong with fundamentals. Firstly, the fundamentals corporate’ financial future are somewhat less rosy than the general hype would have us believe. The rising cost of money and distortions produced by the huge liquidity glut are a serious issue.

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The world of stocks is a highly dynamic one. One has to constantly be on his/her toes in order to keep abreast of the latest developments taking place. To a layperson, it can be intimidating, with stock prices constantly changing every second.

Of course, we have seen during the (in) famous market crashes that can happen when things do not go according to what the markets expect. When unexpected events and their sudden impact on stock prices make even the most experienced among us quiver, imagine what the common investor must be thinking!

However, I am of the belief that certain simple investing habits, if inculcated well into one’s behavior can make one’s investing experience more comfortable and rewarding..

In this write-up I shall restrict myself with stock market investing. As such, the term ‘investing’ used in this article will simply imply investing in the stock markets. Let us now take a look at some characteristics effective investors possess.

Begin with the end in mind: Investing, in its broadest sense, is one of the most basic and important processes of preparing oneself for meeting future financial needs like child education and marriage and retirement. And stock market investing is no different. It has to be followed like a process with an aim of achieving your future financial needs. Started early, and done in a systematic manner, investing in good quality companies can help an investor generate good returns over a long-term.

Think ‘risk-risk’: In making an investment decision, apart from returns, there is one more very important factor that should weigh heavy on your minds — risk.

Simply defined, it is the uncertainty of happening/non-happening of a certain event(s) that is likely to affect future returns. A risk is generally attributed to external factors that create disturbance in the existing scheme of things. Some of these external factors are geo-political uncertainties (elections, terrorist attacks and wars), financial crisis and economic downturn.

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Risk perception is the subjective judgment that people make about the characteristics and severity of a risk.

As I’m writing this piece, a friend of mine and his wife are discussing the cancellation of a holiday to the hill station.. But my friends’ problem is this that an accident took place around the place he wanted to visit a few days back and killing 12 tourists. Now, my friends think that hill roads are too risky to travel on. They are too risky, aren’t they? Well, compared to what?

Human beings perceive and calculate risk in a very non-linear fashion. This may have been OK till prehistoric times but in the modern world, our perception of risk means we are often unable to take the correct decisions in everything from where to go on a holiday to where to invest our money. Savings and investing decisions are almost entirely about how we absorb and process risk-related information and how we balance this out with rewards and gains.

As it happened, when my friends told me about this recent crisis, I had just read an article titled ‘Rare Risk and Overreactions’. It says that human brains are not very good at probability and risk analysis, especially when it comes to rare and unfamiliar events. We tend to exaggerate spectacular, strange and rare events, and downplay ordinary, familiar and common ones. Our brains are much better at processing the simple risks we’ve had to deal with throughout most of our species’ existence, and much poorer at evaluating the complex risks society forces us to face today.

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