Important Features of Equity Market Investors

When it comes to equity market, we always look at it as risky, volatile and hard to predict. However, as humans and investors, if we look into ourselves then we noticed that we have certain stubborn features.

Let us discuss those 5 constant features of the equity market in detail. These features will remain the same in the past, current, and future too.

Features of Equity Market Investors

1. Greed

Let me share the quote from Benjamin Graham.

“The chief hazard of a careful common stock program is not that it may bring unexpected losses, but that its profits will turn the investor into a speculator greedy for quicker and bigger gains — and therefore headed for ultimate disaster.”

The answer is simple. We never view the stock market as a long-term friend. Rather we always have greed inside to create wealth instantly.

Looking at the past and current market conditions, you can easily notice that people are greedy and think the equity market is a kind of place where you can turn wealthy in few years.

No matter whatever the gyaan you preach, this conception will never change. It is mainly because of few so-called experts, media, or social media noise. They will showcase fantastic past returns and force us to believe that the same may happen in the future.

Hence, with this intention people invest in the equity market by taking high-risk investment strategies. Because the idea is to generate as high as possible returns.

Hence, greed is the nature of humans which never changed nor will change in the equity market.

Fear

If you notice the whole equity market, it revolves around greed and fear. Because we humans fluctuate between fear and greed. Fear of losing money or less returns. This fear actually a good thing. However, not understanding how the market works and not preparing for equity market volatility will create more fear inside us.

But eventually, something changes. Either a stumbling block materializes, or a prominent company reports a problem, or an exogenous factor intrudes. Prices can even fall under their own weight or are based on a downturn in psychology with no obvious cause. Certainly, no one I know can say exactly what it was that burst the tech stock bubble in 2000. But somehow the greed evaporated and fear took over. “Buy before you miss out” was replaced by “Sell before it goes to zero.”

And thus fear comes into the ascendancy. People don’t worry about missing opportunities; they worry about losing money. Irrational exuberance is replaced by excessive caution. Whereas in 1999 pie-in-the-sky forecasts for a decade out were embraced warmly, in 2002 investors chastened by the corporate scandals said, “How can I be sure any financial statements are accurate?” Thus almost no one wanted to buy the bonds of the scandal-plagued companies, for example, and they sunk to giveaway prices. It’s from the extremes of the cycle of fear and greed that arise the greatest investment profits, as distressed debt demonstrated last year.”

Fear was and is the constant mindset of investors. However, the best way to come out from such fear is to make sure that you have a proper asset allocation of equity and debt. Along with that, accept the reality that the equity market is volatile in nature (especially in short term).

Herd Mentality

We love to follow the group or trend. Mainly because of various reasons like we feel inferior of our knowledge, we feel the group is more knowledgeable and control over the outcome or sometimes we fail to think independently.

This applies to the equity market also. We love to follow social media groups or few individuals who as per us are experts. But we fail to understand one aspect when it comes to investment, each of our financial life and risk-taking ability is different.

FOMO (Fear of Missing Out)

Fear which I mentioned is a different one than the fear of missing out (FOMO). In the case of normal fear which I pointed out above is something like losing money or loss-making. However, FOMO stands for fear of missing the bus of high returns. This happens especially during the bull market.

When your friend is investing in a stock or particular sector and daily he is gaining something, then obviously you too feel that if you do not invest then you may lose the opportunity of earning.

Hence, BLINDLY you take the route of your friend without understanding his capability, risk, and his financial life by comparing with yours.

If you look at all past bubbles of stock market, you notice this FOMO. Blind following just because someone is investing and turning success means we too hope that same may happen to us also. We never realize our own risk and we never analyze what we want from our own investment.

# Change in risk tolerance

The feature of Bank FDs and equity market never changed. However, it is our perception of how we look during bull and bear market changed our risk tolerance and the way to look at risk.

We as investors many times fail to analyze the risk from nuetral form (without looking at current market condition). This leads to take huge risk during bull market and turn completely a risk averse during bear market.

Try to look at your risk tolerance and you noticed this change. In fact in few cases such change happen due to age, financial freedom or many other aspects. However, change in risk tolerance due to market condition is disaster.