Never let Emotions Overpower Experience

Never let Emotions Overpower Experience

The BSE Sensex is now at a striking distance of 60,000. Just a few quarters back it was trading near 25,000 and it took less than 18 months for the Sensex to gain almost 34,000. Beyond the companies’ earnings and macro economic data, what drives the equity market are psychological biases that lead share prices to deviate dramatically from their true intrinsic value. Even the most learned and intelligent of us cannot resist this crowd psychology and cave in. Sir Isaac Newton, who is credited with development of calculus and formulated the three laws of motion that continue to give a pretty accurate account of nature, lost a fortune in the South Sea Company bubble bust.

Newton, who was also a warden of the Royal Mint in London, was one of the early investors in South Sea Company which bagged a deal to manage British government debt. He booked profit in his early trades only to re-enter the stock at almost the peak of it with more stake. The stock underwent a precipitous fall and Newton lost almost GBP 20,000. After suffering such a loss he said, “I can calculate the motion of heavenly bodies but not the madness of people.” Not even as brilliant an intellectual as economist John Maynard Keynes could resist the fevered markets of the roaring 1920s and lost 80 per cent of his net worth following the great depression.

He famously said, “The stock market can remain irrational longer than you can remain solvent.” Recognising this reality, instead of timing the market it is always advisable to stick to your asset allocation, which should be based on your risk appetite and return expectation. This should be re-balanced at an appropriate time that should be based on evidence and experience and not the crowd psychology or what the social media states. In fact, the social media can be very misleading and it is always difficult to separate the chaff from the grain.

SHASHIKANT

 

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