Stock Market is not a linear playing ground, nor does it behave like one, it usually is a moody irrational person which reacts extremely both in good and bad times. Market behaviour is a translation of sentiments of the investors, which are end of the day humans. If we just draw learnings from the past of how market has behaved, it is safe to say that investors i.e “humans” extrapolate good times to best times and bad times to worse times.

This is how a journey is from good times to best times and from best times to bad times to worse times:

Good times start with decent economic conditions, favourable valuations, muted IPO market, promoters doing buy backs. Then a tipping point comes where investor participation starts increasing since equity as an asset class starts looking more attractive vs other asset classes and participation increases.

Then valuations start inching up because of relatively better growth for a brief period, in this phase investors enjoy both valuation re-rating of stocks as well as earnings growth and during this phase investors make the most returns.

After seeing this phase, new investors join the bandwagon and invest in the market expecting this kind of returns what they’ve seen in the past, but during this phase, investors usually enjoy majorly from some earnings growth and valuation re rating but the returns are relatively lesser than the previous phase.

Then in the 3^rd phase, another new set of investors join who invest money right at the peak of valuations where entire market is priced to perfection, any small underperformance by a company or a small negative news regarding a company or the stock market sends fear in the market which leads to panic selling and stocks go through steep correction.

How to tackle this situation:

First of all irrespective of whether times are extremely good or extremely bad, what matters is all times are money making times, we are in this game to make money and not giving wisdom to people about “I told you so”.

The only thing one should be cognizant about is always have an internal mechanism of independently thinking and forming an opinion of which phase are we in, irrespective of what the ticker suggests. It is easy to say this in hindsight, but we can learn from previous phases, which for some ironic reason cumulatively the “market” i.e “humans” don’t learn, that’s why every once a while we go through this phase of exuberance both good & bad.

During best times, whatever gains you see, always be cognizant that there is an element of exuberance which has made you achieve and enjoy those gains.

During worse times, whatever losses you see, always be cognizant that there is an element of extreme pessimism that is making you witness such drawdowns.

Things difficult to do:

During best times-To sell

During worse times-To buy

Since it is so difficult to do it, that’s why majority of the active funds are not able to beat the index.

As we go through this phase now, there are compelling buying opportunities screaming at you, but our mind today is foggy and is not allowing us to make decisions clearly, take a step back and rethink.