Greed And Fear: When to Use Them

Greed and Fear are two emotions which you should concentrate on eliminating when you are trading in stocks. These are your worst enemies. If not eliminate them, at least use them at the right time. Warren Buffett once said that we should be greedy when others are fearful and fearful when others are greedy. Everybody, or rather most, displayed greed in the year that went by and I was fearful all that time. Fearful enough not to invest any fresh money into the markets but not fearful enough to liquidate my portfolio. I did some portfolio churning but seeing the value of my current portfolio, it seems that wasn’t enough.

I know of an investor who had invested about Rs.15 lakhs (Rs.1.5 million) in the markets (mostly in equity based mutual funds) and had made a profit of more than Rs.5 lakhs. He wanted to buy a car out of those profits (after already having purchased a refrigerator and an LCD TV). His wife had asked him to take out his profits and buy a Maruti Suzuki Esteem or a Swift but he wanted to stay invested in the markets for some more time and then buy a Honda City after his profits increased to Rs.8 lakhs. Perfect example of greed. It was greed that ‘killed’ him. Today, he cannot even afford to buy the Tata Nano (the one lakh car) out of his profits. Thankfully, unlike most people, his capital is safe but all the profits are gone.



Most of us, me included, have seen our portfolio values reduced by 40 to 50%, and some even more. We have lost our confidence in the markets. We have learnt the hard way that markets can never give us anything but can only take. Whatever the markets give us is taken back by them and in much larger proportions. We have understood that we can never be successful in the markets. We are fearful. All of us. No, not all of us but most of us. Because I am not. I am being greedy these days. Being greedy because everyone else is fearful. This is the time to pump in additional capital in the markets.

In the market only those make money who are smart. The rest always lose money. The smart people buy when the markets are down, when there is a lot of panic. And they sell when there is a lot of hype, lot of greed, lot of expectations. They are the contrarions. The ones who do opposite of what the others do. And it is the contrarions who make money.

I once had the pleasure of meeting Mr. Madhusudan Kela, the head of equities of Reliance Mutual Fund, at a seminar to be followed by dinner. After the seminar when everybody assembled for dinner and went straight for the soups and salads, Mr. Kela made his way towards the desserts counter. When asked why he was starting with desserts, he came out with the reply, “Being a contrarion has just become a habit for me.”



Just last fortnight I was talking to a client who was asking for advice on what to do. And I told him that since the markets were in a panic now, it seemed to be the time to invest some additional money. He was scared of what would happen if the markets were to go down further. And I told him what I write in my newsletter. That we can never hope to catch the bottom. The best we can do is to buy close to the bottom. We can invest in times of panic and maintain the last bottom as the stop loss. We only lose a little that way. But we make it all up when the markets start going up.

The most common excuse for people at such times is that there is no money to invest because they did not get a chance to liquidate their portfolio when the market was at a high. I understand that. I have been in the same boat. But invest whatever you can invest in these difficult times. This is the money that will actually make money for you. It is today’s greed that you exhibit that will give you the confidence to be fearful when you see greed all around you.

As mentioned in earlier newsletters, we are inviting our esteemed readers to send in their contributions in the form of articles to be published on this page. Take this opportunity to voice your opinions to the world about the financial situation today, the markets in general or anything remotely connected to the markets. Please e-mail your articles and don’t forget to mention your name and location so that you are given due credit for the article that is published.

Happy investing!!!

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Simple Rules for Analysing Stock Charts

Some people have started becoming bullish now. Fundamental analysts have started saying that markets are fairly valued now and valuations have now reached at 2004 levels. But there are still many who continue to be bearish and say that the worst is still not yet over and there may be a retest of last week’s lows. I personally feel that after such a deep correction, the confidence of a lot of people has been shaken up and it will take time to build up that kind of confidence again. So we may just consolidate between 4500 and 5500 (Nifty) for sometime. The markets do go up now but with low volumes and there is a lot of selling coming in at higher levels. This is what happened yesterday. The markets did go up but with dry volumes. There was no strength in the move as far as the volumes are concerned. We can expect the volumes to increase once the crucial level between 5500-5600 is crossed.

Generally, those who have lost the confidence in the markets (because of the recent fall) do not enter at these levels. They keep waiting till the markets improve and till they feel that nothing could go wrong now. And then they enter. In fact that is the time to sell. The correct time to buy is now. Invest when the markets are beaten down, when the valuations are low and when there is panic in the markets. Be a contrarion to the general public. That is the way to make money.

My technical software is not working today and there are no charts to see and analyse and give my inputs for Monday. However, for all of you who want to learn to look at charts, I’ve consolidated a few simple rules which anybody could apply.

Though, you really do not need a charting software (there are so many charts available online) but you do need to study them. Apply a few simple rules and you are ready to go. But there will be some people who would like to buy a software and study everything in detail. Whenever you buy a charting software, it will come equipped with all the technical analysis tools and indicators. Many of you would have gone through some technical analysis books and would be raring to have a go at analyzing charts with one indicator, and another, and another and yet another.

Well, that is the first step to go the wrong way. The most important rule to remember while analyzing charts is that you have to keep them simple. Remember: “Too much of analysis leads to paralysis.” The best way to study charts is to apply only one or two rules/indicators or at the most three. My personal favorites are trendlines, RSI and MACD.

For those who just want to do it as fun and learn without any real investment in a software, here are a few simple rules you can apply.

Dow Theory: This theory was given by Mr. Charles Dow in 1931. He was the man who started it all. He used to say that stock prices move in trends and one should buy when the trend is up and sell when the trend is down. His definition of an uptrend was when the price made a higher low and then a higher high. Similarly, a lower high and a lower low signified the beginning of a downtrend. This theory can be applied to charts of all time frames.

Trendlines: Trendlines are those lines which connect at least 3 lows or at least three highs. An uptrending line should be drawn by connecting the lows and a downtrending line should connect the highs. The signal that one gets from trendlines is the breakthrough of prices. When prices penetrate an uptrend line, it is time to sell and when they go through a downtrend line, it is time to buy.

Moving Averages: Moving averages, in short, are moving trendlines. You simply calculate the average of the closing prices of the last x days (depends on what period you want to choose. Most common are 10, 21, 50, 100 and 200) and that is the value of the moving average for the last day. And you will be surprised to see how regularly prices find support/resistance at these levels.

For more indicators, it will become too complicated to calculate yourself and it would be best to buy a charting software and then we can probably hold a meeting/seminar and go into the details of analyzing charts. But one should remember that there is no such thing as a PERFECT INDICATOR. It does not exist. But it does not mean that indicators don’t work. All indicators are good and all indicators give very good signals. You just have to be consistent using them.

I hope this article was of some help to all of you. Do leave a comment in case you would like more such articles on a regular basis. Also leave a comment if you don’t like the article and would prefer not to be disturbed with such topics which don’t have any recommendations.

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