12.6 Fear & greed : how to control them ?
FEAR & GREED
There are no two individuals who are identical and their emotional reaction varies. For some investors, greed and hope are more pervasive and may co-exist with pride, love, euphoria or disbelief until fear or panic takes over their emotions. A few of them may be too sensible to detach themselves from the scrip. A majority may stay in a declining stock because of a combination of stubborn pride and disbelief. Others may experience fear but may not surrender to panic. The fear of some investors is so deep and intense that they might not have control over their emotions. So let us discuss a guideline to earn profits; especially when greed takes precedence over intelligence.
The best principles, according to us, are as under:
The above situation is faced when the market is in strong bullish phase. When the market turns from the bear phase to the bull phase, scrips in the bear phase are quite under-valued and therefore there are many scrips that take the form of a roller-coaster ride. However, few investors take advantage of the scrips charged at lower prices when there is a turnaround in the market from the bear phase to the bull phase. It is understood from the survey that hardly 5-10 per cent of investors (mainly big Investors) could take the initial advantage of volumes in the bear phase. Generally, in the bull market, prices vary from 100 per cent to 200 per cent or more. This is determined on the basis of the bull period and the breadth of the market. Initially, the information passed on to the investor takes around three months, and thereafter they buy as there is fair evidence that the bull market has just begun. We believe that in a bull market you are at a greater advantage to capture financial gain unless and until you control the psychological emotion of greed and by applying the principles as jotted below:
First of all, you should prepare a list of your scrips or stocks held by you till date in the following format:
Proforma for keeping record of the scrips held or of new purchase:
- Serial number
- Name of the company
- Number of stocks held or purchased
- Date or year of purchase
- Purchase price (if stocks are old, mention approximate price)
- Amount of investment in the stock
- Which category it belongs to, i.e. (i) Specified Group,(ii) B-1 Group (iii) B-2 Group
- Which industry it belongs to (you can be refer to the Dalal Street Data Bank)
- Code number (ticker number)
Nowadays many websites (like moneycontrol.com, yahoo finance.com, Google fi nance.com etc) give you a free facility to track your portfolios. After having prepared a price chart statement as mentioned above you can daily note down prices of your scrip in the chart. Even for the fi rst price you note down in the statement you will know the difference in your purchase price and market price. For new purchase of stock, you can also prepare a statement as shown above. Now you are ready for the action.
Generally, in a good bullish market, the prices of A group shares change slowly because they are reasonably at a higher level. The B-I group shares, generally considered as liquid shares, move faster than A group shares. The B-II group shares are 3rd category stocks and normally move faster than both the aforementioned categories and this is where you should take prompt action because these stocks move upward faster and are likely to come down sooner as they are not fundamentally strong. The Z category of stocks is to be watched very carefully. Once the price of the scrip increases, exit as quickly as possible.
- If you are holding A category and B-I category stocks and you find that they have risen by more than 33 per cent; you should sell 25 per cent of the stock.
- If the prices have shot up by 33 per cent, book profit in balance 50 per cent of stock and wait for the right opportunity to sell balance stock only when you figure out that you are getting a good price and good profit. For instance, you have purchased 500 stocks for Rs 100 i.e. you have invested Rs 50,000. If the stock moves up by 33 per cent i.e. it goes up to Rs 133 then if you sell 125 shares you get Rs 16,625. On further rise by 33 per cent from your base price, you sell further 50 per cent of your balance stock i.e. 175 shares, which will give you Rs 29,050. You have realized Rs 45,675 against your investment of Rs.50,000. You are left with a balance of 175 shares to sell above 100 per cent profit keeping in view the market condition. Even if you sell those 175 shares at a rate of Rs 200 per share, you are getting Rs 35,000 and your overall profit would be 62 per cent. If you can wait further after watching the market condition, you may earn higher profits. In this scenario, you are in a safe position when you book profits on 300 shares at a rate of 50 per cent. In the case of B-II stocks, sell 25 per cent of stock when the profit margin is more than 25 per cent. Sell 50 per cent of the stock if prices rise up by 50 per cent and balance of stock to be sold as per the market condition. But if you are getting 100 per cent profit, sell your entire stock.
- For Z category of stock, consider selling your entire shares as soon as there is liquidity in that scrip as these stocks are not regularly traded unless some big operator pushes the prices for these stocks for his or her benefit. If you adopt this practice, your greed would be automatically controlled. You will not be a victim of nervousness and fear. In this process, you can get rid of your B-2 and Z category of stocks and even enjoy profits with your initial capital. Out of the proceeds from sale, you can invest in fundamentally good stocks and make your portfolio almost risk-free.
However, here are some factors that you should be aware of:
- When you have sold your stock as suggested above it is possible that the prices of some stocks may appreciate more and you may feel depressed as to why you have sold these stocks early. In the stock market scenario, one should not repent any action. If you have made less profit by selling early, you at least have utilised the out of sale proceeds and those shares will give you better returns in the future.
- The second important point is that if the prices of the stock you hold have gone up; don’t purchase this stock again just because you feel that you can make more money. Buy these shares only if some professional or reputed journal recommends you to purchase the same scrip at the existing price. Though you might be getting tips from your friend or broker or any staff member of the company, always do a self-study of the record of the company and scrutinize thoroughly the data and confirm it.
- Those who are giving you free tips i.e. your friend, broker or staff member of the company would not guide you when to sell these shares. Always be on an alert mode before considering such tips. Never invest on the basis of rumors. Interested parties spread rumors and take investors for a ride. This happens 90 per cent of the time. Consult genuine and reputed journals and financial newspapers for selection of your investment. Subscribe to magazines/newsletters like Dalal Street Investment journal and Flash News Investment for regular updates and authentic information rather than browsing through a guide that might actually misguide you. These journals/ newsletters also review past recommendations and provide ‘book profit’ call when it is time to sell. If you follow these principles, you will not be bogged down by emotions like greed, fear or dissatisfaction and you will make good profits.