PERSONALISED INVESTMENT MANAGERS

Emotions and Investment

18 December, 2020


          
            Emotions and Investment

“If you cannot control your emotions, you will not control your money”

– Warren Buffett

 

The year 2020 brought out a whole lot of emotions in all of us. We saw many uncertainties and surprises come our way, including extreme fear and even a glimmer of hope. In this one year we have experienced one of the most turbulent period in our lifetime. But here’s the silver lining … all of us are slowly but surely limping back to normal.

Let us first look at how the SENSEX moved during this period and then superimpose its impact on investor emotions and therefore behavior at the stock markets.

Perhaps this is a good time for us to just sit and look back at the past 12 months, rewind and reflect on this chaotic time and analyze the larger emotion and behavior exhibited by the majority of people. What were their reactions, responses and mind-set during this period?

 

When it comes to investing and investment related decisions, our emotions play a major role. And these emotions impact returns on our portfolio, thereby shaping the path of wealth creation for us.

THE FIVE PHASES – EMOTIONS AND INVESTING :

There are 5 acknowledged phases which come over time as a function of emotion and investing. They are normally seen over large tranches of time, probably over a decade. But here’s the kicker, we have seen all these emotions impact Sensex movement through just the year 2020 because of COVID 19.

1. Emotional High
2. Fear and Panic
3. Confusion with Uncertainty
4. Acceptance with Hope
5. Euphoria

PHASE 1
Jan 2020 > Emotional High & Market High!

Pre – COVID the market saw the market growing and investors were on an emotional high. The SENSEX was at an all time high of 41,953 on 14th Jan-2020.

Market High + Emotional High = Buying Behavior.


PHASE 2
Mar 2020 > Emotional Fear & panic & Market Crash

The COVID19 News caused wide spread global panic and fear. The SENSEX crashed in March, 2020 and hit a low of 25,981 on 23rd March-2020 – a correction of 40% from its peak. High institutional and FII selling was seen as people looked to exit uncertain market investments. Conserving cash became the mantra.

Market Crash + Emotional Shock, Fear & Panic = Selling Behavior.


PHASE 3
Apr - Jun 2020 > Emotional Confusion + Uncertainty & Market Volatility

During the COVID-19 lockdown period (from March, 2020 onwards till July 2020), there were several conflicting emotions with high uncertainty that were felt by investors. Lockdown imposition, factories shutting down, auto sales down, allied ancillary units going bankrupt, malls/ high street closures, commercial rentals were down. Migrant movement back to their homes all contributed to panic, anger and pessimism.

Investors showed many types of behavior, some of them being:

Shock, Panic and Pessimism – some investors exited all equity investments when the markets crashed, thinking that the worst had descended on them.

Anger – some investors who had added money into the markets or equity mutual funds in January 2020 when the markets were high, felt angry because their equity losses were very high. Some of them also sold their equities and booked huge losses because of this anger.

Cautious – Some other investors just held on to their equity investments according to their plan, without adding any more.

Stable – But a few investors set aside their emotions, cut the outside noise and continued their investments into equities according to their original financial plan.

What do you think was the movement of the market?

From 24th March-2020 to 15th June-2020 the markets gave an absolute return of 24%.

Emotional Confusion & Uncertainty + Market Volatility = Many types of Behavior I.E. Panic Selling, Hold or Buying.


PHASE 4
Jul to Sep 2020 - Emotional Acceptance & Hope Rally

Phased unlockdown led to more emotional acceptance of a new way of life and hope resurged. Also, governments across the globe started reopening their economies… Positive news flows came in regarding reduction in death rates and increase in recovery rates because of COVID 19. This period kindled hope as well as optimism for the future.

From June 15th 2020 to August 31st 2020 the SENSEX steadily moved upwards and gave an absolute return of 19%. In this period because of the visible upward trend in sensex, value buying opportunities became more visible giving rise to optimism

Emotional Acceptance with Hope + Optimism in the Market = Buying Behavior.


PHASE 5
Oct to Dec 2020 and till March 2021 -
Market Euphoria & again historical all time market highs!

More re-assuring news about the COVID vaccine arrives, normal economic activity restarts, positive recovery data on industry and economy, reduction in death rates, higher COVID recovery rates, and opening up of the cities in India as well as travel led to more emotional balance and happiness in all of us. During this period, some investors who had exited their equity investments in March 2020 or did not continue their equity investments started re-entering the stock markets, maybe feeling they had missed an opportunity.

From September, 24th 2020 to December 4th 2020 the SENSEX breached the old historical high and reached 45,000 levels … an absolute return of 23%. In the last quarter of 2020-2021, it surged a further 5000 points to breach 50000

Positive COVID Related/Economic/Market News + Happy Emotions to be back to normal = Buying Euphoric Behavior.

Year 2020 was a roller coaster ride for our Emotions and Investments, all seen in a span of 12 months!

The Sensex climbed to a Pre – COVID high in January, dropped with a collapse of 40% and went back up by 75%, -all in 223 trading days!

It took only 176 trading days for the markets to reach a Euphoric High in December 2020 from its low on 24th March, 2020, all with the positivity and emotional acceptance of COVID 19! And today it is at an all time high breaching 50,000. If only investors had divested emotion and continued to invest prudently, imagine the growth in their portfolio. This would have given them Alpha returns!


Conclusion

Our emotional behavior clearly impacts our portfolios since it leads to actions such as buying, holding or selling our equity investments. Market volatility and emotional volatility go hand in hand. The goal and objective of equity investments is wealth creation over a long term and this will happen only if we control our emotions during times of crisis as well as euphoria.


– Mimi Partha Sarathy
Managing Director Sinhasi


How did you behave during this pandemic? It is important to stick to your financial plan and asset allocation and avoid allowing emotions to come in the way for financial success. To be truly successful, your financial planner should be able to calm you in turbulent times and reign you in during the euphoria. Don’t let emotions get the better of you.

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