"Modern humanity is sick with FOMO – Fear of Missing Out – and though we have more choice than ever before, we have lost the ability to really pay attention to whatever we choose." – Yuval Noah Harari
Modern or not, as far as investing is concerned, humans seem to have always fallen prey to this irresistible urge. I am not going to reproduce in its entirety this over-used example, but one of the most brilliant minds of all time, Isaac Newton, lost a fortune on a "hot" stock (South Sea) bubble precisely because of this folly of man.
Due to the liquid nature of public markets investing and easy access to daily stock price quotes, investors typically experience FOMO because they have already "missed out" on some eye-watering stock rally. I am sure you have experienced it too, whether it is during crypto currency rallies or the recent obsession with day trading in distressed companies like Yes Bank.
Between "novice" retail traders piling on in bull markets (and showing off their daily profits on WhatsApp groups and Reddit forums) and "experts" predicting an impending crash or vice versa, the best investment strategy for your financial and emotional wellbeing is to be calm and consistent – it is easier said than done.
As an example, look at Sensex' behaviour between 2006-2008. In 2006, the Sensex went up 47 percent. Now, when a stock runs up a lot in a short amount of time, some short term traders (let's call them 'bears') bet on it going down, and there are other short term traders ('bulls') who bet on it continuing its rally up because the stock is "hot".
The next year, in 2007, the Sensex went up another 47 percent. So, the bulls won big at the expense of the bears. However, in 2008, the Sensex went DOWN 51 percent! and the tables turned. Hence, the bears and bulls oscillate between euphoria and depression. Such FOMO induced manic behaviour and short-term trading will make investing seem like spinning the roulette wheel, where the odds are always stacked against you.
Similarly, we have recently seen several potential investors be concerned that the market has run up too much and trepidation to enter at these 'all-time high' levels. There are two potential issues here:
1.> The 'market' being referred to is almost always either the Nifty50 or Sensex, a basket of just the largest (by market cap) 50 and 30 stocks, respectively. Remember there are more than 2,000 stocks listed in India. While the Nifty50 seems to be scaling new heights every day, the MS 400 index (a basket of the 400 largest mid-cap and small-cap companies) is still 5-10 percent off its all-time high that was achieved in January 2018 – nearly three years ago!
2.> Like the situation in 2007, at the end of October 2020, the Nifty50 had gone up by more than around 50 percent from the COVID-19 induced crash in March 2020. Several market participants contended that the market was over-heated, and a correction is imminent. Lo and behold, the Nifty50 instead went up another 11 percent in November. As always, it is almost impossible for anyone to predict what will happen next. I would steer clear of trying to time market entry and exits based on Nifty or Sensex levels.
From the perspective of long-term wealth creation and especially for non-professional investors, it is best to follow a systematic approach and remain undeterred by the cacophony of market pundits and their projections. Following principles of asset diversification and based on one's risk profile, it is prudent to always have a certain percentage of one's savings invested in the equity markets, irrespective of market levels – either through SIPs or other mechanisms.
Humans, whether retail investors or professional fund managers, tend to over-weight the recent past – this is not a choice, our biology dictates this type of behaviour. As Harari, one of the greatest philosophers and historians of our age, points out in the quote above, even though we may have access to numerous choices (extrapolated to investing, many of which may be sound investment strategies), we are not equipped to think in abstract terms or deal with complex systems (for example, equity markets with thousands of listed stocks and millions of trading strategies).
On the other hand, machines are unbiased, unemotional and unaffected by market euphoria and panic. Computing power has grown a trillion times in the last 50 years and is now able to assimilate and handle the level of data generated by typical stock markets with ease. Hence, it is a given that machines will make better investing decisions than humans over the long-term. Computers already run 60 percent of trading activity in the US, an equity market that, measured by market capitalisation, is around 20x the size of India's equity market.
To summarize, inspired by one of my favourite Warren Buffet quotes, I think it is in your best interest that you keep yours or a 'human' fund manager's "emotions from corroding" your net worth. A systematic and disciplined approach will allow you to maximize your upside in the long term.
(Atanuu Agarrwal is the Co-founder of Upside AI.)Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.