How Emotions Affect Stock Market: My Top Lessons From Investing in It
What I learned from investing in the Sri Lankan stock market — only a couple of months before the coronavirus pandemic hit the world.
I invested tiny amount from my salary into the stock market for the first time ever in 2014. However, I quit the market without earning or losing much in that period. It was too much of hassle for me to keep track of financial information and most of all I didn't understand how the system worked. When I exited I vowed to never get back into it.
Then five years later in 2019 — I decided to try my hand again at the stock market betting on the bright future ahead for the country post the Presidential Elections in November. Things looked great, I assumed political stability will boost investor confidence. So I headed deep into it and invested ten times the amount I invested in 2014. Big risk brings big returns. I had no idea just like everyone else on what was in store for the world in 2020.
A couple of weeks after my investment, I only had like only 20,000 rupees profit. Prices of some stocks began to slide yet nothing too drastic so I held on to it.
Then came the grand 2020.
A couple of days into the year, the escalating tension between Iran and the US dominated the news. My stocks began to drop even further and it was inevitable to exit without facing losses. Towards the mid/end of January, my portfolio dropped by 7%. It was a shock to me because I didn't enter the market to lose my money.
As I was contemplating whether I should hold or exit the market. The news of COVID-19 broke out and it was all downhill from there. Throughout the lockdown and quarantine I had to fight the urge to sell my stocks. There were predictions on the future where economy will plunge further and recovery would take 2, 3, 5 years and so on.
By Mid- May 34% of the total money that I invested has just disappeared into thin air, as stock prices fell.
It was such a stressful time whenever I thought about my investment, where I regretted every day for taking the decision to invest. However, thankfully I decided to wait till the panic subsides to make a call. So I gave myself time to hold on and wait patiently till November 2020 (which will be a full year since I invested in 2019). Whether I gain or lose at least I have something to learn and that seemed to calm me down.
So thats what I did, forgot about the stock market, did not talk about it or check for market updates and went on with my life.
Then things gradually started improving as the lockdown eased and the prices started gradually increasing. It started to slowly pick up and the potential losses were narrowing down from June onwards. So, it went from negative (34%) in May to just negative (2.75%) towards the mid of September. The last 10 days of September has been great, as the prices kept increasing to the point that I got 10% return from my total investment.
Here I have summarised my key learnings by investing in the stock market, and I believe the pandemic tremendously contributed towards accelerating my learning.
Emotional Intelligence
Financial Intelligence is only half the equation, the rest lies in navigating your emotions in periods of stress. People with emotional intelligence react differently when their buttons are pushed. There are countless advices from well-known investors claiming the most popular phrase
“BE PATIENT. Crisis will end and opportunities will be tremendous. Don’t let emotions drive you to make poor decisions”
The age old advice of patience which is considered as the most important factor when it comes to investing in the stock market. However, practicing it in reality especially in such a volatile, uncertain condition is tough.
Towards the beginning of the lockdown in March, panicked shoppers rushed to stockpile groceries, household essentials to cope during what seemed like an indefinite lockdown. Similarly, investors were engaged in panic selling out of fear at the stock market. Emotions are around us — and it plays a key role in making decisions when investing in the stock market. There is fear of losing money, emotional attachment of holding onto doomed stocks or avoiding certain picks and euphoria of the future prospects are some of the emotions that drives the market.
“The stock market is controlled by emotions”
Now once the market takes off, the next most important question is how do you know when is it the right time to sell? Again even if it depends on a multiple factors based on one’s risk aptitudes etc.
Even during the last couple of months, when the prices were picking up I was slightly pessimistic and perceived that the market will crash as the market is obviously disconnected from reality. However, the results proved contrary to what I perceived. However, I learned that its important to take note of the investors sentiment in addition to mine.
As long as there is an inflow of investors perceiving the stocks that you hold/stock market to be valuable then the show can go on. It all boils down to whether people think how much a particular stock will be ‘worth in the future’. That explains why the stock market is disconnected from reality. Most importantly, exit before the flood of new investors dries up and there isn’t much money to go around.
So in summary, emotional intelligence is about understanding yourself and others and that plays a key role in stock investments.
