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Thursday, May 10, 2012

Why the current state of the stock market makes me happy and sad

The state of the stock market make talking heads in business TV channels happy or sad – depending on whether the indices are trending up or falling down. Their business depends on bull markets, which attracts more viewers and more advertising revenues. But investors are supposed to be dispassionate about the state of the market, right?

Not quite. Most small investors tend to be bulls; i.e. they try to buy low and sell high. They feel happy when stock prices move up during bull markets and their paper profits increase by leaps and bounds. Then they fail to sell at the appropriate time, only to see their paper profits start to disappear. They hang on with the hope that prices will start rising again, and end up feeling sad when profits turn into loss.

Why is the current state of the stock market making me happy and sad at the same time? It is because of recent reader queries and emails I have been receiving. Mostly they ask variations of the same question: “I want to buy XYZ stock; is this a good time/level to enter?” The first part of the query has made me happy for two reasons:

1) The selected stocks have been some of the better known and fundamentally strong stocks. No longer are readers asking my opinion about Bartronics or Suzlon or Geodesic or Punj Lloyd. That shows investor maturity.

2) Most small investors want to buy when the bull market is already at an advanced stage. They buy at a high price with the hope of selling at even higher prices, and become victims of the ‘Greater Fool’ theory. But the current state of the market seems like the tail-end of a bear market or the early stage of a bull market. Wishing to enter now is again a sign of investor maturity.

It is the second part of the query that has made me feel sad, because it made me realise that investor psychology hasn’t changed in 100 years despite the advent of nuclear energy, rocket science and computers. How so? Here is what Larry Livingston (a.k.a Jesse Livermore) mentioned in his reminiscences: “The average man doesn’t wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think.”

It also makes me sad that after four years of effort in maintaining a blog, I have not quite been able to simplify technical analysis for lay investors so that they can take their own decisions about when to buy and at what level. Here is another quote from Livingston/Livermore: “Nobody can make big money on what some one else tells him to do.”

Remember and internalise that last quote. You have to depend on your own judgement for long-term investment success. The sooner you make the effort to learn the rudiments of technical analysis – I’ve written a free eBook on the subject – the easier it will be to decide when to buy or sell and at what level.

Related Post

Why investors fall prey to the Greater Fool Theory
When should you 'hold' and When should you 'fold' a stock?

2 comments:

Jasi said...

Sir,

Happy to be a part of many others who have inspired you to write this blog.
So, I'm glad to be the one who made you happy and sad to be the who made you not so happy.

Subhankar said...

Thanks for your comments, Jasi.

The post was intended as a wake-up call to blog readers to use me as a sounding board rather than as a crutch.

The type of question I'd like to receive from readers is: "I want to buy XYZ stock at the current price level because of the following three reasons. Am I on the right track or should I be considering some other parameters as well?"

The type of question to which you will not receive a straight 'yes' or 'no' answer is: "Is this the right time to buy XYZ stock or should I wait some more?"

At the end of the day, you should feel happy or sad about your own decisions - not about mine!