Greed, Fear & Hope – An investor’s worst nightmare
September 1, 2021We, humans, are emotional beings. We go through a multitude of emotions every day – love, anger, hate, fear, greed, selfishness, lust, hope etc. Why are we even talking about human emotions here? Because these very emotions can very much affect the thinking capacity of a person. Financial Market is an extremely volatile place. So are humans. Emotions like greed, hope and fear will affect the decision-making capability of any individual and make you extremely volatile and vulnerable as well. Financial markets are strongly driven by these emotions which are powerful enough to actually hold, sway or even break them.
Greed is the irresistible longing to possess something more than our needs. In the case of a financial market, it is the longing to earn more and more returns; thereby throwing caution to the wind. When an individual starts getting decent returns in the market, the person might get greedy and yearn for better yields. This leads them to take uncalculated and unprecedented risks, thereby giving adverse results; eating into what the person had earned so far. Greed can also trigger addiction which can cause the person to take obnoxious decisions. In some cases, greed can also create a bubble wherein a group of people affected by the greed starts to buy more and more which in turn increases the prices and turn into an economic bubble crisis.
Another strong emotion is fear. Some people might claim that fear is good as they will take a very calculated and safe approach. But in reality, they will be holding themselves back unwittingly thereby denying the better returns they could have garnered. Yes! Fear makes people wary and avert them from succumbing to greed. But market fear can be a much more dangerous situation than greed. Fear might not be such a big word in terms of one individual, but see it collectively and you will realize the seriousness of mass fear. People start asking “How much bad can it get?” when there is a decline in the market and start pulling out their investments. This can lead to market crashes, which makes it one of the strongest emotions.
Hope may seem a good emotion. Everyone needs to have hope in their life. But haven’t you heard the saying “Excess of anything can be bad!” It can just be the inverse of fear. People might see potential in an investment or company which might seem to grow right now. Everyone starts thinking “How good can it get?” leading to over-optimism. There are many situations in the market where people tend to overbuy foreseeing a better prospect. Due to the volatile nature of markets, anything can go wrong anytime which will lead to a dip in value and thereby burning deep holes in one’s pockets.
Having seen that these emotions can take us for a ride down the hole; we can try to stay afloat in times of distress. Don’t think about becoming overnight billionaires when you step into the capital market. Such happenings can be a mere stroke of luck, but the majority of the time it is not so. Insightful knowledge of the market should be there before venturing down its lanes. There should be a clear boundary as to where one has to stop. We also have to refrain ourselves from revenge buying. Seeking revenge for a loss by overbuying can lead to disastrous consequences. At the start, we said that humans are emotional beings and they will continue to be so. But the better we are in control of our emotions, the better everything will turn out to be. Markets are heavily controlled by such emotions and awareness and check on these emotions will benefit us as well the markets in the long run. After all; the better the market, the better we turn out to be.