Thursday, May 27, 2010

Profit on equities - a myth?

When too many investors think alike, nobody is thinking - Marc Faber

EVERY single expert was bellowing that this stock would be a multi-bagger. We picked the right stocks, it went up significantly, it seemed like it will continue to go up – so we held it close to our heart and dreamt of buying a Ferrari.

Just when it was, ‘a lil’ more kind of thing’ everything came crashing down. Our losses mounted and we were forced to sell and book losses. The news flow from every source was negative and so were all the decisive expert views. The markets once again seemed to conspire against us, because in just a little time, the markets were back in form and doing well!

How many of us identify with such scenarios? How many of us have gone through those emotions? What do emotions have to do with contrarian style of investing or for that matter, what does it have to do with investments at all? Well, I would say, a lot!

‘Ill-timed’ investments
The markets do the usual - a heady bull run followed by steep falls when the pundits spell doomsday and finally things falling in place, eventually translating into a turnaround. The human sentiment just does not seem to rationalise on this pattern even in the long run. Given the fact that each of these are inter-related, rational human behavior has the potential to simply kill the volatility of equitymarkets, leaving us with a linear graph!

In fact, we are not the only ones on the wrong side of the market. The graph (on page 2) depicts, how time and again ‘Greed and Fear’ have played havoc on the market, there by creating profitable opportunities for the contrarian investor.

It is a simple rule to make money on markets: ‘Buy Low, Sell High’. Surprisingly from the above graph, people were doing the exact opposite. In fact, a lot of the selling happened at market lows!

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