The 3 types of Investor Behaviour in the Current Market
“What’s happening in the current environment? The data is not so good, but markets are going up” said Raj, a seasoned senior corporate executive.
When the market goes up irrationally, no one is worried (rather everyone is happy looking at portfolio reports and many do not even bother looking). This is a period when everyone wants to invest (I call it the Buy High and Higher Phase). On the other hand, when the market goes up in an uncertain environment (or in an extreme environment that we are in), there are 3 camps of investors.
The first type is when people say, “I don’t want to miss the bus and I want to invest as I see the markets are still down by 25% and they are going up every day.” There is a little bit of FOMO (Fear of Missing Out) as they missed investing at the lowest levels in March. Now they see the markets going up every other day and Foreign Institutional Investors buying so they want to buy.
The second type of investor is indifferent (markets will do what it wants to do, and I need to do what I need to do). The second type says that “I have really no control on what the market will do. However, I have a fair degree of control on what I can do. My goal was to buy low and lower whenever I get it without predicting the short-term direction of the market.” These people continue with their SIP (Systematic Investment Plan), start new ones and even sell the debt to invest in equity.
Raj is the third type of investor. They are trying to micro analyse and looking at every data point available to figure out the reason for the market going up like this. Some of them want to be out of the market and then get in right before they are sure the markets have reasons to go up (that everything is now fine, and the markets should go up).
Even in the US, despite historic unemployment numbers, the markets continued to climb. In fact, the Small Cap Index (Russell 2000) even outperformed the S&P 500 (US Index of the Largest 500 companies) by a significant amount. The NASDAQ has almost wiped off the entire losses and is in the positive. This is despite the worst unemployment rate since the Great depression in 1933 and 30+ million people having filed for unemployment insurance.
Investors in the US have similar questions too “Why is the market going up? I just do not understand. It’s so bad and why is it going up”.
So, which camp are you in and which camp should you be in? (have answered this one in the end).
Will the markets continue to go up like this? I cannot make any predictions but those who do will tell you that the markets are going down to March lows or some will even say the worst is over. Yes, the markets can retest the previous lows or even be down for an extended period.
How many of us can bet a million dollars and say that the markets in 5 years will be lower than the highs it made at the start of the year (we are still 25% below that level)? None and it would be foolish to do so.
My response to whether the markets will continue like this is slightly different. “Honestly, I do not know, and neither can anyone know. However, the reality is that it does not matter whether it goes down in the short run or not. What matters is the State of your Personal Economy (Your income, expenses, assets, liabilities to just name a few), and your current needs/goals. Are any of your current goals getting impacted because of this?” I can confidently say that people who have done sensible financial planning might not be impacted in their personal economy (Yes there could be income cuts or lost income, portfolio could be up 2-5%, flat or even down 10-20%). The point I am making is that they will have enough to maintain their lifestyle, pay for their goals, and ride these uncertain times financially.
Yes, a few years from now the markets would have made new highs despite the world being in a new normal (That is just because of the progress human beings are capable of making even in the worst of times). There is no doubt about that as the key fuel for long term markets is confidence, optimism and people see these in real different ways.
We can debate on this for hours with pros and cons of each statement, but the reality is that action drives results. Most of the time, we will not understand why the market behaves in a certain way (Just imagine we cannot understand 1 person’s behaviour and here we are second-guessing what millions of participants who have conflicting goals are doing). The markets generally do not require our permission or agreement to go up or down.
Every investor will go through all the emotions of the three types of investors at some point of time in their investing journey. The key is HOW do you Act.
Like the third type of investor, I too fail to understand why the market is going up now. Do I act like the third type of investor? Absolutely not. In fact, I am more like the second type of investor and focus on things that are in my control. In the current environment, it is maintaining enough liquidity to manage my businesses and lifestyle, buying low, taking stock of all my goals including my near-term goals (like my daughter Reet’s US education coming up next year), helping as many people as I can, and evaluating opportunities in the current environment.
2 Warren Buffett’s quotes came to my mind as I was writing this:
a. “The stock market is designed to transfer money from the active to the patient.”
b. “Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic.”
P.S. I had written about the signal and noise column that every investor must understand (Do read it) and I continue to follow those signals and certain new ones that are evolving.