How do your LOGIC and EMOTIONS work in Stock Market?

 15^th January 2022

How do your LOGIC and EMOTIONS work in Stock Market?

Dear Fellow Investors,

Namaste! I am used to listening to my clients – they understood my logic / they are convinced with me or my study. Naturally, the next step should have been to implement what they have understood logically or convinced with the logic or science behind what I have said. But they are not ready to implement, in spite of logically agreeing.

It’s like a girl says yes to the marriage proposal and is not ready to get married. You will find that there are still many people who are not ready to take Vaccines for COVID in the World. You may laugh at the above, but this is how human psychology works.

Let us deal with that with an example from the 2^nd World War.

The Battle of the Bulge was one of the deadliest American military battles in history. Nineteen thousand American soldiers were killed, another 70,000 missing or wounded, in just over a month as Nazi Germany made an ill-fated last push against the Allies.

Part of the reason it was so bloody is that Americans were surprised. And part of the reason they were surprised is that in the rational minds of American generals, it made no sense for Germany to attack.

The Germans didn’t have enough troops to win a counterattack, and the few that were left were often children under age 18 with no combat experience. They didn’t have enough fuel. They were running out of food. The terrain of the Ardenne Forest in Belgium stacked the odds against them. The weather was atrocious.

The Allies knew all of this. They reasoned that any rational German commander would not launch a counterattack. So the American lines were left fairly thin and ill-supplied.

And then, boom. The Germans attacked anyway.

What the American generals overlooked was how unhinged Hitler had become. He wasn’t rational. He was living in his own world, detached from reality and reason. When his generals asked where they should get fuel to complete the attack, Hitler said they could just steal it from the Americans. Reality didn’t matter.

Historian Stephen Ambrose notes that Eisenhower and General Omar Bradley got all the war-planning reasoning and logic right in late 1944, except for one detail – how irrational Hitler had become. But that mattered more than anything.

How decisions are taken?

Decisions are thought logically, presented logically but implemented only and only when emotions are triggered. Steve Job was asked to remove the PANRCEASE due to cancer. He was convinced by the best of the doctors but he waited for 8 months to make the decision. In his Biography– he repented having waited for 8 months.

The normal people do the reverse – they take the decision emotionally and then they give the LOGIC to support their decisions. Whatever they do – they operate out of emotions only but to keep up with society – they give the logical reasons for their actions.

How does this affect your performance in Stock Market?

It is common for me to see an investor buys a stock for the long term and sell it 2-5-10% profit on the same day. It is also common to see that they buy the shares for trading and when it goes down – they don’t follow stop loss and hold it as investments. I have seen many so-called long-term portfolios are full of this kind of stock only.

One way to think about this is that there are always two sides to every investment: The number and the story. Every investment price, every market valuation, is just a number from today multiplied by a story about tomorrow.

The numbers are easy to measure, easy to track, easy to formulate. They’re getting easier as almost everyone has cheap access to information.

But the stories are often bizarre reflections of people’s hopes, dreams, fears, insecurities, and tribal affiliations. And they’re getting more bizarre as social media amplifies the most emotionally appealing views.

A few recent examples of how powerful this can be:

Lehman Brothers was in great shape on September 10th, 2008. Its Tier 1 capital ratio – a measure of a bank’s ability to endure loss – was 11.7%. That was higher than the previous quarter. Higher than Goldman Sachs. Higher than Bank of America. It was more capital than Lehman had in 2007 when the banking industry was about as strong as it had ever been.

Seventy-two hours later it was bankrupt.

The only thing that changed during those three days was investors’ faith in the company. One day they believed in the company. The next they didn’t and stopped buying the debt that funded Lehman’s balance sheet.

That faith is the only thing that mattered. But it was the one thing that was hard to quantify, hard to model, hard to predict, and didn’t compute in a traditional valuation model.

GameStop was the opposite. The statistics showed It was on the edge of bankruptcy in 2020. Then it became a cultural obsession on Reddit, the stock surged, the company raised a ton of money, and now it’s worth $11 billion.

Same thing here: The most important variable was the stories people told and the emotions they suddenly stumbled upon. And that was the only thing you couldn’t measure and couldn’t predict with foresight. That’s why the results don’t compute.

What NEXT?

It makes sense to be aware of your logical and emotional sides while you are investing or doing anything. Your honesty in doing the above – will be the key to your success in your life and investments. The faster you balance them, the fastest will be your success. 

Wish you all a very happy weekend.

Follow me on Twitter @hiteshmparikh Or on Whatsapp - +91-9869425399.

Learn a Lesson. Live with Passion & Invest with Reason.

Hitesh Parikh.