How to balance the anxiety of a bull market and the calm of a bear market3 min read . Updated: 22 May 2018, 12:02 PM IST
There is significant churn between bull and bear markets. Stocks that look like they can only get more expensive in bull markets look very different in bear markets
The perfect recipe to disaster for a serious investor is to discuss an emerging stock idea publicly. First, the idea is not going to play out to a timetable. Emerging ideas do not follow sharp timelines while turning an investment premise into stock price performance. Neither can we expect markets to take swift cognizance of an emerging stock. But people expect a stock to perform based on the reputation of the investor. In bull markets, there is barely time to even think and people take notice of every move, hang on to every WhatsApp forward, and remain in a hyperactive mode. Oddly, there would hardly be any clamour for recommendations in bear markets when the investor is actually working hard on his investment ideas.
In bull markets, time and public perception play an important role in an investor’s performance. People action almost every word they hear and willingly outsource investment responsibility to the source of information. “If Mr X is buying this, saying this, or rumoured to be thinking on these lines, there has to be something in it" becomes the default investment process. Taking a public stance on a stock becomes a kind of endorsement and responsibility. Even a statutory public disclosure of shareholding pattern or bulk deals become the investor’s responsibility.
Every investor’s moment of truth is when a peer, probably a less experienced investor, publicly seeks stock-specific advice. Any such advice needs to hold good in a regulatory reference. An open mention of an investor’s engagement with a stock is effectively a proxy recommendation. Then, an investor’s engagement with accountability begins. And, it can be never-ending.
The need to identify newer ideas and to latch on to emerging winners manufactures intense internal anxiety. We often see investors increasing recommendations as a bull run intensifies. This is quite common among the community of investment ideators, followers, sidecar investors, and portfolio cloners. Inevitably the question will be: “What is your next stock idea?" An investor may not actually know the answer. But while he is searching for ideas, he also has to deal with the pressure of catering to his public following. Often, this can be detrimental to both. Look at how several serious investors handle a persuasive request from a coaxing anchor on television, or from their ardent followers during public interactions. The unease is apparent.
But peer engagement becomes a lot easier when markets are coming off their euphoria. The investor dwells deeper into his work of ideating stocks. As markets hit low after low, his tendency is to focus on learnings, vision and quality advice. He knows that performance is a long way off. Market context always provides the best relief. During bear markets, such investors get obsessed with their investment process. Their public communications tend to be centred around how they are becoming better at investing.
There is significant churn between bull and bear markets. Stocks that look like they can only get more expensive in bull markets look very different in bear markets. We start to think that they can only get cheaper. The sense of urgency seen in bull markets gets replaced with a sense of disinterest during bear markets; we tend to slow down, and investments see reduced churn. Peer engagement reduces significantly during this transition. Investors come around to accepting things as they evolve, and we stop seeking external validation for our thoughts. In bull markets, every little bit of data and knowledge input is seen as extremely valuable. But in bear markets, we typically see a company result only after a few days.
Our behaviour differs significantly in bull and bear markets. This must be addressed. How we approach bear markets is critical to our investment performance. While corrections bring a sense of calm, we need to slowly regain our sanity. We must settle into the emerging reality. And if the emerging reality is worse than we had imagined, we should be resilient. We need to slow down, shifting into learning mode and reflection. Gradually, the trend will turn towards cynicism than optimism. The scales could even tilt to the other extreme where it’s difficult to improve investment conviction.
The challenge before every investor is to find our optimism in the midst of what goes around us. Ultimately, Mr Market remains the best guru.
Shyam Sekhar is chief ideator and founder, iThought