Well, I’m writing this not to entertain or inject some sort of optimism in an obviously shaky situation of the current market. Which is actually an understatement, because it is more of a spiral downturn that appears to be unstoppable in the immediate future (with even the most optimistic is starting to have doubts over, by the way).
I’m sharing this, partly because I, myself, is fearful over the uncertainties of my investments, that’s why I need to verbalize (it really helps). But mostly because I wanted everybody to understand the psychology of the market which underlies human reaction and which is an important component of the instability or stability of the market.
When I first started investing in mutual funds (pooled money invested in stocks) and individual stocks I had little idea of how they work. For me as long as it offers higher interest than a time deposit and it is legal, then I’m okay with it. But of course, I did research and tried to absorb the process-which took a little while because initially I couldn’t assimilate how the heck I could own a part of the company (without going there to do business with the owners!) and earn by selling such a right (without me knowing how much the company is actually earning!). What’s so confusing is that such a claim could be valued higher or lower than its original (or worse, actual price) by anybody who holds it, in minutes! It took me a book , and several internet articles, before I finally understood it, realizing in the end, that psychology is an essential element. Not to mention a lot of speculation, prognostication, foretelling, prediction, prophesy. How can we be sure that a single blast in Mindanao could cut the earnings of Jollibee corporation? Of course, there’s no way of telling, we know this, and yet we sell our shares.
In stock market, a company sells part of the right of possession to the public in terms of the number of shares, say 10 shares representing 10% of the total ownership, which is then valued accordingly. The public then buys this in a stock market, in the hope that he could sell this to a much much higher price. The stocks’ worth is usually based on its ability to make profit. If the company is getting or is bound to get a lot of revenue the holder of the stock sells it to a much higher price. But why, then, do stocks exhibit such volatile movements? It surely is not sensible for a stock’s price to fluctuate so much when the intrinsic value is not changing by the minute? This is because most investors regard stocks as a trading vehicle. Why bother check the cash flows (which is hard and time consuming to find, by the way) of these companies if you can sell the stock to somebody else for more than what you paid for it? You get profit when another investor buys it for a price you just speculated on! This is what cynics call, the greater fool theory.
Knowing when to buy or sell is dictated partly by the economy but mostly by human psychology.
Everybody would want to invest when the financial system and all the factors that might affect it (politics, crime rate, business, etc) are in perfect shape (of course!). And avoid it if any of this factor is in bad shape-no matter how fundamentally sound the economy is, no matter how valuable a particular stock is. But how could we know? By what we see in the media and the internet. If there’s more happy talk, the more we invest, the less happy the picture becomes, the more we withdraw. Thus, people are lured into investing (or buying a particular stock) by the volume of the market. The less there are who are buying, the more we sell, and the less the price of a share becomes. And loss is incurred.
Man’s fear to the current situation, is but a natural one. In the first place, happy talk now would look a pretentious act in trying to put cool in what appears to be an inferno (okay, mostly supported, but still partly predicted), given the many sad things they say about the market (transparency is appreciated), and the accessibility of information. In fact, it may even heighten the alarm, because as anxious as we are, we become paranoid and may interpret things as deceiving and conspiring (that, even the $700bilion dollar bailout law could not calm the investors). Yes, fear is part of normal psychology, but being apprehensive about something we do not know is not. Most of us are being lured into getting our investments out – partly by fact, but mostly by predictions and by market volume. The same dynamics that may have gotten us into investing, anyway. But that is how the stock market works.
Trying to be calm in a pandemonium is like suicide. But until now I have not redeemed any of my investment which have incurred a 30% paper loss already. The thought of getting the loss actualize (by redeeming it) is as distressing as the idea of leaving it in uncertainty.But still, for some reason (probably because I am still able to destress by rationalizing), I would want to try the market out. For as long as it takes, as long as I can regain all my capital – or more. I have minimized investing temporarily though. Besides, no matter how devalued they are for now (which is partly speculated) as long as the companies listed in the stock market are in business, there will always be the hope of profitting. As long as they exist, there will be someone interested in acquiring them as they represent ownership.
Well, in the case of human reaction, I know that later than sooner, will panic start to diminish. It is human instinct to survive. Otherwise, we would not last this long and prevail over any other species. This is not optimism, but rather faith in mankind.
I’m sharing this, partly because I, myself, is fearful over the uncertainties of my investments, that’s why I need to verbalize (it really helps). But mostly because I wanted everybody to understand the psychology of the market which underlies human reaction and which is an important component of the instability or stability of the market.
When I first started investing in mutual funds (pooled money invested in stocks) and individual stocks I had little idea of how they work. For me as long as it offers higher interest than a time deposit and it is legal, then I’m okay with it. But of course, I did research and tried to absorb the process-which took a little while because initially I couldn’t assimilate how the heck I could own a part of the company (without going there to do business with the owners!) and earn by selling such a right (without me knowing how much the company is actually earning!). What’s so confusing is that such a claim could be valued higher or lower than its original (or worse, actual price) by anybody who holds it, in minutes! It took me a book , and several internet articles, before I finally understood it, realizing in the end, that psychology is an essential element. Not to mention a lot of speculation, prognostication, foretelling, prediction, prophesy. How can we be sure that a single blast in Mindanao could cut the earnings of Jollibee corporation? Of course, there’s no way of telling, we know this, and yet we sell our shares.
In stock market, a company sells part of the right of possession to the public in terms of the number of shares, say 10 shares representing 10% of the total ownership, which is then valued accordingly. The public then buys this in a stock market, in the hope that he could sell this to a much much higher price. The stocks’ worth is usually based on its ability to make profit. If the company is getting or is bound to get a lot of revenue the holder of the stock sells it to a much higher price. But why, then, do stocks exhibit such volatile movements? It surely is not sensible for a stock’s price to fluctuate so much when the intrinsic value is not changing by the minute? This is because most investors regard stocks as a trading vehicle. Why bother check the cash flows (which is hard and time consuming to find, by the way) of these companies if you can sell the stock to somebody else for more than what you paid for it? You get profit when another investor buys it for a price you just speculated on! This is what cynics call, the greater fool theory.
Knowing when to buy or sell is dictated partly by the economy but mostly by human psychology.
Everybody would want to invest when the financial system and all the factors that might affect it (politics, crime rate, business, etc) are in perfect shape (of course!). And avoid it if any of this factor is in bad shape-no matter how fundamentally sound the economy is, no matter how valuable a particular stock is. But how could we know? By what we see in the media and the internet. If there’s more happy talk, the more we invest, the less happy the picture becomes, the more we withdraw. Thus, people are lured into investing (or buying a particular stock) by the volume of the market. The less there are who are buying, the more we sell, and the less the price of a share becomes. And loss is incurred.
Man’s fear to the current situation, is but a natural one. In the first place, happy talk now would look a pretentious act in trying to put cool in what appears to be an inferno (okay, mostly supported, but still partly predicted), given the many sad things they say about the market (transparency is appreciated), and the accessibility of information. In fact, it may even heighten the alarm, because as anxious as we are, we become paranoid and may interpret things as deceiving and conspiring (that, even the $700bilion dollar bailout law could not calm the investors). Yes, fear is part of normal psychology, but being apprehensive about something we do not know is not. Most of us are being lured into getting our investments out – partly by fact, but mostly by predictions and by market volume. The same dynamics that may have gotten us into investing, anyway. But that is how the stock market works.
Trying to be calm in a pandemonium is like suicide. But until now I have not redeemed any of my investment which have incurred a 30% paper loss already. The thought of getting the loss actualize (by redeeming it) is as distressing as the idea of leaving it in uncertainty.But still, for some reason (probably because I am still able to destress by rationalizing), I would want to try the market out. For as long as it takes, as long as I can regain all my capital – or more. I have minimized investing temporarily though. Besides, no matter how devalued they are for now (which is partly speculated) as long as the companies listed in the stock market are in business, there will always be the hope of profitting. As long as they exist, there will be someone interested in acquiring them as they represent ownership.
Well, in the case of human reaction, I know that later than sooner, will panic start to diminish. It is human instinct to survive. Otherwise, we would not last this long and prevail over any other species. This is not optimism, but rather faith in mankind.
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