Greed & Fear in Investing
Tired of investing becoming an emotional roller coaster? Investing is supposed to bring peace of mind, not ruin it!
Hopping from one fund / stock to the next, chasing returns, is an investment nightmare. Every year, thousands of investors who are looking to double their money, earn high returns with no risks or predict the next money doubling stock, end up losing money instead. From stocks to real estate to crypto, the same rules apply to every asset class. People invest after markets have gone up, because their ‘friends have earned higher returns’ or they got a hot stock tip from a broker. More often then not, these greed or fear driven investing decisions prove to be extremely value eroding. It’s time to get off the emotional roller coaster of investing and create long term wealth instead!
Attain Financial Freedom
Investing peace of mind comes from following a robust process, customised investing roadmap and purpose. Together, these equip you with investing resilience.
Resilience to overcome greed and fear, to remain invested despite market volatility. Remaining invested brings the power of compounding to your investments, the single most powerful tool to create wealth!
Returns are a reward for your patience, the longer you can withstand volatility the better the probability of higher return
Why trading with stocks or crypto usually fails
Its mostly noise in the short term
Intraday movements are mostly just market noise – with a large buy order pushing prices up and a large sell order dragging prices down. Day Traders can go from “Bitcoin is great” to “Bitcoin is dying” in a matter of minutes. Neither fundamental nor technical analysis produces any meaningful results when you’re trying to predict price movements of a stock or crypto over short time frames. Hence, most traders start knowingly or unknowingly relying on luck to produce results. Trying to earn high short term returns is a race you’lll never win unfortunately.
Emotions run high
Traders usually start their day by searching online for hot stocks to buy today or looking at TV channels for hot stock tips. After that, they are glued to their holdings and typically full of adrenaline during trading hours. Emotions run high, clouding judgment and resulting in losses. Many first-time day traders encounter the ‘beginners’ luck’ syndrome which falsely convinces them that ‘winging it’ will continue reaping rewards. Over the long run, traders WILL lose money as a result of constant greed/ fear driven decision making.
The rewards are small
Because the rewards of even a successful day trade are typically very small in size, traders are forced to go back in the game and again to reap a profit of any significant magnitude. Every time they trade, they increase their transaction costs, tax liabilities, and most importantly – their odds of losing. Over the long run, this works against them.
Trading is irrational
Traders find it extremely difficult to stick to stop losses. Since the time frame remaining to the eventual forced close of the trade is usually just a few hours away, they end up irrationally deciding to ‘wait’ for their position to recover. This often results in a series of repeat losses; with each subsequent loss fuelling more panic and irrationality. Instead of doubling money, they mostly end up halving it!
As a smart investor, its time to stop asking ‘how to double my money in stocks’ and asking ‘how can I achieve my financial goals’ instead! Trading only leads to losses in the long term. Stop chasing hot stock tips and building long term wealth through disciplined investments.
Are your SIP investments suffering from a ‘behaviour gap’?
Did you know that 10-year SIP Returns from most small cap funds as of August ’23 has been a mind bending 18% plus per annum. And yet only a handful of investors would have actually earned these returns - the difference between 18% and the returns earned by these clients is known as the ‘behavioral gap’ that is caused by greed and fear. Let’s familiarize ourselves with some of the behavioral biases that many smart SIP investors succumb to often.
Always "doing something” with your investments (Action Bias)
Your first enemy is the action bias, or the tendency to grow impatient when things don’t go exactly as anticipated. Since SIP’s run contrarian to the market, you get more units when markets fall and vice versa, there could be extended periods of accumulation when returns are flat to negative. When this happens, the immediate solution is to go out there and ‘do something’ with your portfolio. Bear in mind that in doing so, you might just be switching out of a potential star performer due to your impatience to double money quickly!
Panicking whenever your fund fall in value (loss aversion bias)
Your second enemy is the loss aversion bias, or the tendency to exit every time your money falls into the negative. This trait is more pronounced in investors who want to earn high returns without risk, and so have mismatched expectations. These investors also tend to worry a lot and check their portfolios more frequently. Think about this – the NAVs of most small cap funds fell 40-50% in barely a month during the pandemic nearly 3 years back. Your hard-saved SIP investments would have been deep in the red by then. Did you continue with your SIP’s when everyone was making doomsday predictions? Or did you decide to stop your SIP’s for a while and restart them when things got better? This is how fear can derail your investing journey.
Being swayed by the news or trying to ‘play the markets’
Your third enemy is the tendency to get swayed by news. In the past ten years, doomsday predictions have come (and gone) countless times. Many investors would have stopped and started their SIP’s on the basis of these news flows at least five times in this period. Instead of getting you closer to wealth creation, these news driven decisions would have increased the behaviour gap in your returns.
The best way to beat the behavioural gap in returns is to set clear financial goals and remaining aligned to them instead of fixating on short term fluctuations in your SIP portfolio.
FAQ’s – Greed and Fear in Investing
How can I double my money quickly?
Unfortunately, trying to double your money by predicting the stocks to buy today or continuously searching for hot stocks will only result in losses in the long term. Such a gambling mindset will result in fear and greed driven investing decisions that will continuously erode your capital.
Which is the best crypto to buy right now?
Like any speculative investment, its impossible to predict the Best Crypto to buy Right Now. In fact, cryptocurrencies themselves have not been able to deliver long term value to most investors till now, Most investors have burned their fingers in speculative crypto trading after their prices have gone up. Just because some new coin is the trending crypto today, doesn’t mean it’s the right investment. Its best to stop checking crypto prices and work with an expert on a clear, goal based financial plan instead.
Where can I get hot stock tips daily?
Getting hot stock tips daily is easy – all it takes is a simple Google search! The bigger question is, will finding the best stocks to buy today actually help you create wealth in the long run? Multiple studies have shown that investing based on tips and trading with stocks and crypto will lead to long term losses for investors. Long term wealth creation can only happen by following a disciplined, goal based approach to investing.
How can I earn high returns with low risk?
A zero risk investment, in theory, can only give you as much returns as a government bond. Any return above that will require taking some degree of risk. Beware of so-called research analysts who actually just give stock tips and promise high returns with low risk. These are usually scamsters in disguise. Remember, long term wealth creation requires you to take a certain degree of risk. Consult with an expert and figure out how to do so effectively.
Attain Financial Freedom