Where are we in the fear and greed cycle?

by Manshu on November 7, 2013

in Uncategorized

An obvious question on yesterday’s post was where we are in the fear and greed cycle, and sure enough Ketki asked that question.

Here is the image I used yesterday.

To provide a quick answer, I believe we are somewhere between Hope and Optimism as far as Indian markets go, and a bit higher than that for the US markets, however as I stated yesterday that is my opinion and there is no way for me to know where we will be six months from now or twelve months from now.

This comment also brings me back to a question Santonu asked in the Suggest a Topic page.

Here is his question.

santonu October 26, 2013 at 8:07 am [edit]

Manshu ,you often write that you pick up stocks when market is down or stocks are at attarctive level.What is your strategy when market is high like these days ,sell or wait for further fall or keep idle

REPLY

There are a few things I do in a high market, but all of them stem from believing that the market runs in cycles and the length of those cycles can be quite unpredictable.

Roger Nusbaum put this very well in a recent post:

I think it is hugely beneficial to take a moment during a huge rally to remember that at some point the market will go down a lot again and create stress (fear) for a lot of people. Then like every other stress-inducing decline it will come back. The rate at which it bounces back might be fast or slow but it will come back.

When that next big decline comes your portfolio will either go down more than the market or less than the market and then it will recover at some rate that is either fast or slow.

If the above reads as being stupidly obvious, that is exactly the point because the above is how it actually works. Thinking about it in terms of A follows B matter of factly and of course repeatedly can go a long way to reducing whatever stress might come along from a large market decline.

 

So, given all this, here is what I do.

Sell the stocks that are high

When I buy a stock, I have a file that lists down its qualities and a fair price. If the company goes a lot higher than the price I have in my file, and this usually happens during up-markets, – I sell the stock. In the past year I have sold 3D Systems that went up quite a bit more than the fair value I assigned to it but unfortunately for me, it continued rising further even after I sold it.

Reduce purchases

I don’t stop purchases altogether because there is no way to know if I am right about the cycle or not, and how long it will last. I’m also not patient or brave enough to wait for crashes and only buy when there is panic. A recent example of a buy is  Zynga which I think will do well in the years to come and I didn’t want to wait for a crash to buy it.

However, the money I put in the markets is a lot less than what I put in during panics.

Build on savings

I am sure a lot of us personal finance types have Excel files, Google Docs or online portfolio tools that help us keep a close track of our net-worth. In my case, I have a Google Spreadsheet that has my liquid net-worth and I find it motivating to see small up-ticks in it every month. By saving money and adding to it I find motivation, and energy that I’m heading in the right direction. So even if I’m not putting money in the market, it is getting put in my brokerage account and adding to that number, also, it is ready to use whenever I need.

Pay down debt

It is also very useful to pay down whatever debt you have in the form of car loans or home loans during these periods. The interest rate on these is high, and it is usually a good idea to pay them down so you can reduce the total number of EMIs. So far, I’ve been lucky enough to pre-pay every loan that I have taken, and periods of high markets are the best for this.

Build on your list of stocks

I find it interesting to look at companies, and the whole investment process thrills me, so I continue to build on my list of stocks that I could potentially invest in – screening companies that I come across in my daily life.

An interesting phenomenon that I have noted is that screening companies in high markets makes it a lot easier to invest in them in low markets. What happens is that valuation is very subjective, and when the market has assigned a price to a stock, your own valuation is biased by that and you tend to assign a number close to it.

When the market falls, and the stock halves (happens more frequently than you’d like) – it is a lot easier to now invest in this stock.

Conclusion

So these are some of my own ideas around the process of investing when the markets seem high. I hope you find them useful to your own process, and I’ll be happy to answer any questions you may have.

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