When it comes to stocks, Fear is greater than Euphoria. How, you ask?
Unlike a lot of people investing in stocks, I do not like to indulge in a lot of averaging down these days. Let me explain a little where this is coming from.
Well, a lot of times my stock purchase decisions for stocks in a market that is going down are made on momentum. And that, I’ve grown to experience, is driven more by emotion than any chart or data. Investor decision in a bearish or bullish market is driven by corresponding human emotions of fear or euphoria. Based on previous experiences, I’ve seen that fear can be a far greater motivator than euphoria. If we were to quantify that in some way, we would perhaps be able to observe that a typical stock, which is from a well-respected company and has its things in order, will typically lose more in percentage number terms on a bearish day than gain a similar number in a bullish day – I am sure that there are exceptions to this but this is something that I’ve generally observed.
So, if that is in fact the case, the recovery from the slump will be prolonged and if you already own the share, this might be even longer for you to see profits since it has to recover the amount that has been lost and then some (to cover brokerage, taxes etc.).
So, that’s one of the indicators that I use to not average down when a particular stock has slumped to a region where the momentum of recovery would be longer. The recovery time period can perhps be reduced by putting that same money in buying a completely new stock that has slumped down in that bearish period. But, again figuring out which well-respected stock has reached the peak of investor fear (i.e. bottomed out) in a bearish period is again a study in its own right 🙂
Having said all of that, would love to hear from you, the intrepid reader that has stumbled upon this obscure post, about your opinions in this topic. Please do leave a comment or opinion on this as a clash of ideas might either cancel each other or resonate, yet it’d always lead to an advancement (however minuscule it may be) of the edges of Man’s thinking.
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