Greed & Fear In Financial Markets

It is an old saying that stock market movements is driven by two major human emotions i.e. fear and greed. Although this may be a simple generalization but it can often be true especially in case of day traders. Furthermore if someone falls prey to these two emotions, it can have quite a detrimental effect on investor’s portfolio. Let us analyze the influence of these emotions on psyche of investors.

Influence of Greed

A lot of the times, investors get caught up in greed as most of us have a desire to accumulate as much money as possible in least possible amount of time.

A perfect example of this greed is the internet boom of the late 1990s when every broker had to just pitch a IT stock to clients and they will just leap on to it as if there is no tomorrow. As a result a lot of internet related stocks were grossly overpriced due to greed of investors which created a bubble which burst in mid 2000 and resulted in heavy losses for investors.

This get-rich-quick mentality is among the biggest cause of most stock market losses as investors don’t adhere to a strict investment plan. In such times it is important to stick to the basic fundamentals of investing, such as maintaining a long-term horizon, rupee-cost averaging and avoiding following the herd.

Influence of Fear

Being fearful can be as detrimental as being greedy as it results in loss of opportunity for investors to invest at attractive valuations. When stock markets suffer heavy losses over a period of time and become quite attractive, there is a general tendency of investors to get scared of stock markets and they move to safe heavens such as debt, gold etc even though equity is available at attractive valuations.

The aftermath of dotcom bubble bust is a perfect example of fear as investors stayed away from equity markets for considerable amount of time after the bust and in the process missed out on opportunity to invest in stocks at attractive valuations.

This reaction to fear is also among the root cause of most stock market losses as people stops adhering to their long term investment plan and shift to low risk low return assets which don’t help to build a reasonable corpus over a period of time.

Conclusion

 The final decision with regards to investment lays with the investor and so does the responsibility of gains and losses in those investments. It is very important to control your emotions, whether it is greed or fear, and to stick to a strict investment plan in order to build long term wealth. However at the same time it is equally important to be reasonably dynamic as far as your investment strategy is concerned

In the words of Warren Buffett: 'Be Fearful When Others Are Greedy and Greedy When Others Are Fearful'

An Article by Rajat Gupta – Research Analyst – Concept Securities Pvt. Ltd.