Psychology Of A Market Cycle

JOIN STRATEGIC ALPHA COMMUNITY

More than 3600+ People are a part of the tribe. Sign Up now to Receive, Newsletters, Blogs, Webinar Invite, Wisdom Posts, Potential Multibagger Ideas.

November 21, 2021

l

Strategic Alpha

Stock markets are driven by market cycles. People experience different emotions during these market cycles ranging from fear to greed. Here are the different emotions experienced by investors during market cycles.

Disbelief

This phase happens after the bottom has been hit. The market goes up after it has hit rock bottom. There is a sense of disbelief among investors about the rally. They believe just like it happened in the past few months, the markets will fall again. Many good stocks bought during this phase end up being multi-baggers.

Hope

During this rally, there is hope that recovery is possible. For instance, after the crash of March 2020, the Sensex was in the 30,000’s. During that time, after the lockdowns opened up there was hope that there would be a recovery. This phase also presents good opportunities to buy stocks.

Optimism

During this phase, the realization dawns on most of the investors that the rally is real. Investing during this phase if stocks are chosen well can give good returns.

Belief

This is the time when the majority of investors are convinced about the market rally. They believe that now is the time to be fully invested. Some naysayers still don’t believe in the market rally and advise caution. But, stocks if chosen well during this period with a clear plan to exit can give decent returns.

Thrill

This is the time when people are thrilled about the stock market. Many people buy stocks on margin and tell others to buy stocks. Some veteran investors like George Soros might also buy during this period. George Soros once said that if he sees a bubble developing, he rushes to buy it.

Euphoria

This is the phase where there is irrational exuberance in the stock markets. Everyone in the market thinks that he is a genius because he has made a lot of money in stocks. It is advisable to stay cautious during this phase.

Greed/Buy

This is the last phase before markets hit the top. Everyone wants to be in the stock market. For instance, in 2007, there was widespread greed in the market. Similarly, in late 1999 to early 2000s, there was widespread greed in stocks, especially in IT stocks/internet companies before the IT bubble burst. Similarly, just before the Harshad Mehta scam burst, the phase was characterized by unbelievable greed. If you buy stocks during this phase, you are sure to lose money. If you buy during this phase, you are sure to lose money, whatever stock you buy.

Complacency

During this phase, there is a correction from the top. But, the majority of the investors still believe that once the cooling-off happens, the next rally will start. However, this phase presents a good opportunity to liquidate your stock holdings.

Anxiety

Investors believe that the dip is taking more time than expected. This is the time when people get margin calls because of the stock market fall. This makes them anxious.  

Denial

People live in denial during this phase. They believe that since their investments are in great companies, they will bounce back.

Panic

This is the phase when everyone is selling stocks and there is wide spread selling. Herd mentality takes over and neighbors and colleagues are selling stocks. This is a good time to buy stocks extremely selectively for the long term as it may be very difficult to know even for well-informed investors whether we are in the denial phase, panic phase or capitulation phase (the next phase). 

Capitulation

This is the phase where there is a significant fall in the markets. People start believing that they need to move 100% out of the markets. This is the wrong decision on the part of investors as you are selling close to the bottom of the cycle. For instance, when the Sensex was crashing and many stocks were in lower circuit in early March 2020, many investors moved out of the markets. The Sensex has given stellar returns since then.

Anger

This is the phase just before the bottom is hit. During this phase, there is a widespread tendency to blame government and corporations for the crash that has happened. Also, there is anger. The general question that does the rounds is – Who shorted the market? During this phase, stocks can be bought as the bottom will soon hit.

Fear/Sell

This is the best time to buy stocks as the markets go up from here.  Many stocks purchased during this period end up being multibaggers. Sensex gave returns of more than 17% from the depression phase of March 2009. Here are some stocks which became multibaggers if bought during the depression phase of 2009.

 

Stock CAGR since 2009 depression phase up to mid-October 2021
Supreme Industries 30%
Havells 23%
Kajaria Ceramics 37%
Cera Sanitaryware 44%
Aarti Industries 34%

 

Depression

This is the period when investors believe that their retirement savings are gone in stocks and their financial security is affected. People start blaming themselves for investing in stocks. However, many people don’t know that stocks will go up from here. This is also a good time to invest and many multibaggers can be bought during this period

 

Though the phase that we are in comes to be known only in hindsight, we can have a rough idea about what phase we are in even during the present. This would be possible with a good understanding of market cycles and investing psychology. 

For Enquiries Related to Mentorship Program Kindly Contact Mr.Ganesh at 9922112692

The author of the blog Mr.Suyog Dhavan is a Full-time Investor / Value Trader and Value investing/Trading Mentor. His style of Investing is inspired by Mohnish Pabrai, Peter Lynch, and Porinju Veliath. He is the founder of Strategic Alpha Wealth, A Premier stock market mentorship firm with a mission to touch the lives of 1Lakh people through its mentorship program.

0 Comments

Mentees

Learn more about us

Strategic Alpha is on a mission to change the wealth lives of over 1 Lakh people through mentorship based fortune creating investing model.

We Believe wealth is the ability to fully experience life, so we are on the mission to give you this experience of life.

Monthly Blog Readers

%d bloggers like this: