Market Sentiment plays a very important role in determining Market Valuations. Euphoria in markets results in frothy valuations and panic in sentiment results in extremely lucrative valuations. If only an investor could be factoring in these periods of extreme panic and extreme euphoria, one can save himself from making wrong decisions around market entries or going overboard with his position sizing on investments.
Market Sentiment plays a very important role in determining Market Valuations.
Euphoria in markets results in frothy valuations and panic in sentiment results in extremely lucrative valuations.
If only an investor could be factoring in these periods of extreme panic and extreme euphoria, one can save himself from making wrong decisions around market entries or going overboard with his position sizing on investments.
But before we move further on this subject, lets read on to know what world’s most successful investor, entrepreneurs and a famous academician – scientist had to say on these biases.
Legendary investor, Warren Buffet in his 1986 letter to Berkshire Hathaway shareholders wrote that,
“Occasional outbreaks of those two super-contagious diseases, Fear and Greed, will forever occur in the investment community”.
Investor behavior driven primarily by Greed and Fear is responsible for the dizzying highs in bull markets and subsequent crash in bear markets.
Jeff Bezos, the CEO of Amazon once asked Warren Buffet, “Your investment thesis is so simple. Why doesn’t everyone just copy you?” Buffet responded to Bezos by saying, “Because no one wants to get rich slow”.
It is said that even Sir Isaac Newton lost a lot of money in a speculative investment in shares of one of the hottest stocks in Britain during his time. Reflecting on his losses, the great scientist said, “I could calculate the motions of the heavenly bodies, but not the madness of people”.
Stock market prices reflect the collective investment behavior of all investors.
Greed and fear are base instincts driving investment behavior but they are greatly detrimental to investors’ financial interests. It is not easy to remain calm in highly volatile markets. But if you do not let greed and fair affect your investment behavior then you may be in a much stronger position to meet success in investing.
Intelligent and smart investors uses some tools and back of the hand calculations to gauge how high the tide is on Market Sentiments or in extreme panic. Here in this article we have discussed, only two such tools and ways amongst many available.
Market Mood Index (MMI)
MMI helps in understanding market direction and valuations. It is a sentiment index and should not be taken as standalone indicator for making a buy or sell decision.
Click on the link below to have a first hand view of Market Mood Index and the sentiment which prevails in current Market.
https://www.tickertape.in/market-mood-index.
If you wish to know more about the construction of MMI and its working, click on the given link.
https://www.youtube.com/watch?v=rIq_X4gKXhI
Google Searches Market Sentiment Indicator Tool
This tool gauges investor participation in markets by way of search queries around the term multibagger stocks on google.
The underlying assumption is that most searches are executed on google using the term multibagger. Extreme euphoric market conditions make investor execute these searches on google which is then captured by this trend result.
Click on the links below to gain access to the tools we have identified and check how the market conditions are in terms of Greed and Fear.
https://trends.google.com/trends/explore?date=2018-01-01%202022-10-22&geo=IN&q=%2Fg%2F11bwkdllch
To conclude, the Holy Grail in Investing is “Reversion to Mean”. Markets represent crowd psychology at large. It its cycles it goes through periods of Greed when People Buy and Buy at all sort of valuations and prices and Periods of Fear when crowd participating in Markets is in extreme panic and is willing to sell at any price and get out of the Markets. In between these two extreme conditions there are transitioning periods of Optimism, Enthusiasm, Exuberance, Euphoria leading to Anxiety, Denial, Fear, Despair, Panic, Discouragement, which represents the best time for investments. While the Market sentiment is in Dismay, Hope creeps into the Market sentiment which leads to Relief and leading back to Optimism again.
Would you like to make an assessment on where on the Market Cycle are we right now ? Refer to the image below.
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