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Went for Avengers in first week? You are at risk of losing money in stocks

Analysts say in the current market rally, a large part is being driven by emotions.

, ETMarkets.com|
Updated: May 03, 2019, 02.07 PM IST
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Aditya Narula, an eighth class student from Meerut, forced his father to go for Marvel Studios’ latest superhero film, Avengers: Endgame in the very first weekend.

Such was the rush for the movie when it opened on April 26 that some theatres operated 24x7, tickets got sold out a week in advance and in some places grey market ticket prices soared up to 10 times.

The trigger for the rush was not really the superheroes, but what stock analysts call

FOMO or fear of missing out – a behavioural response that leads to herd mentality in stock investing.

Aditya fears missing the movie viewing experience and being left out when his classmates and peers discuss the movie the next day.

“The desire to be first to earn bragging points (greed, in stock market) often comes at an additional cost,” says Jiten Parmar, co-founder, Aurum Capital.

Financial markets are full of such instances, when investors ignore valuations to run after a trending theme, even if it means overpaying.

Cryptocurrency was one big example which left many investors trapped in 2017. The digital currency soared nearly 9,500 per cent to trade at $19,300 in 2017 only to crash thereafter and hover around $5,300 on this date.

Legendary investor Charlie Munger, Warren Buffett’s partner at Berkshire, once said bull markets go into people’s heads. “If you’re a duck in a pond, and it’s rising due to a downpour, you start going up in the world. But you think it’s you, not the pond.”

In the stock market, extreme optimism and fear of missing out regularly take stocks to extreme levels. Investors who can beat FOMO with emotionless strategies manage to protect themselves from major wealth destructions.

Fear, greed and hope are the three most potent emotions in the stock market. Anyone who has spent many years in the market would testify that each of these emotions end up harming the process of wealth creation.

“FOMO is actually more of greed than fear,” says Kolkata-based value investor Abhishek Basumullick.

When you see stocks go up every day and see your friends and relatives make money, it is psychologically very challenging to stay rational. “At some point, you throw in the towel and decide to chase the rising prices, which is when you end up losing big money,” says he.

Investors who put in big money in real estate player Unitech during its hey days in 2008 are now hoping for a miracle to recover their money. The scrip that scaled its all-time high point of Rs 546 on January 2, 2008 now trades at Rs 1.40.

Nocil is another such stock, which hit its all-time high of Rs 3,500 on April 2, 1992, but today trades at Rs 130. JP Associates sank massive investor wealth.

Analysts say even in the current market rally, a large part is being driven by emotions in the runup to the election outcome in late May.

BSE Sensex, which hit an all-time high of 39,487 on April 18, trades at a price-to-earnings (P/E) multiple of 28 against its five-year average of 21.60, signalling plenty of exuberance and overvaluation. The P/E ratio measures the price you pay for per rupee of current earnings.

Analysts say FOMO is at work among investors in the Indian market, as they are betting on a rally similar to the one seen in 2014 if the general election brings back Prime Minister Narendra Modi for a second term. Any adverse result will dent sentiments, leading to a deep correction in the market, they warn.

Sunil Subramaniam, MD and CEO, Sundaram Mutual Fund, said, “30-40 per cent foreign inflow is coming on hopes that Mr Modi will come back, and 60-70 per cent is due to a global surge in liquidity, which is seeking higher returns. India is getting its share.”

“When there is fear of buying on Dalal Street, be a buyer. When others come out to buy due to FOMO, be a seller. Be patient in between,” says Parmar, a market veteran.
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