Understanding of Perception: key ingredient for success in stock markets
Updated: Mar 12, 2020
Ask someone what the color of the water in the ocean is and many would reply “it’s blue”. Ask a physicist and the answer would be “it’s colorless”, why? Isn’t the color supposed to be the same irrespective of who’s seeing it?
Very much yes, but that’s how perception works. Defined as a way of understanding, regarding or interpreting something, perception is powerful to the extent that it can even make reality look different from what it actually is.
Whether its Science or stock markets, perceptions really matter.
Let’s relate this to our stock market performance over the past one year. Despite the poor performance of most sectors and an even steeper down-slide in GDP growth numbers, FII inflows are on the verge of crossing Rs. 1 lakh crore. SENSEX is booming and we have seen it crossing its past high’s in more than one instance. This clearly indicates that the parameters of economic performance have not made a negative impact on people's perception. But why?
The reasons for positive perceptions could be many. Investors worldwide are probably hopeful that the Modi government will swiftly take India to the 5 trillion dollars mark. Another factor inducing positivism could be the comparatively poorer economic performance of the benchmark countries like China to which investors tend to weigh India’s growth against.
Mind you that perceptions keep changing and many a times changes abruptly, and these changes cause stock prices to fluctuate. The perception or viewpoint of investors frequently keeps altering based on anticipation of changes in future outlook. So, what seems a buying opportunity now may not hold true in near future. Therefore, as the saying goes one should “Never judge a book by its cover, and never judge a stock by its price”.
Investors look towards a company’s financial results and sophisticated charts to make an investment decision, but even that is not enough as both of these only depict history. Portfolio managers around the world and we as well at MFSL use a combination of different methods ranging from custom-made & proprietary tools to many other qualitative and quantitative techniques based on the nature and requirements of each portfolio to evaluate a stock as there is no available “one size fits all” approach for the same.
An important parameter we at MFSL consider is ‘The Elasticity principle’ wherein we gauge periods of high price movements. Some stocks at certain times fluctuate very high and during rest of the times are devoid of much movement. Prudently investing during the high fluctuation period holds greater potential to earn more in relatively short period of time. Buying stocks just because they are available cheap is also not an intelligent way to invest. Many times, such stocks can remain undervalued for long and investors get stuck in so called value traps.
Another strategy we usually follow at MFSL is booking small profits. MFSL’s annual return of around 17% in last five years is outcome of many such proprietary investment styles including this concept of booking small profits at regular intervals.
In a nutshell, managing every portfolio requires the use of qualification, experience and time in different proportions, and only he who possesses all of these three attributes should venture into the perilous ocean of investing all alone. If you do not possess all of these and still choose to go alone, are you not risking your capital?