We all have experiences in life, which unknowingly condition our minds to react in a certain manner in a certain situation.
During my childhood, I once burnt my tongue while drinking a glass of hot milk.
It left such a strong impact on my mind that for the next few years, I would excercise extreme caution while drinking anything which looked like milk including curd.
Let me share a very famous story about how conditioning of the mind works.
A camel seller was taking ten camels across the desert to the market after a day-long journey. As the night approached, he thought of resting and decided to tie up the camels. After tying up nine camels, he realized that he did not have any more rope left to tie the tenth camel. Worried that the camel might run away at night, he sat there looking at the camel, unable to sleep.
A passer-by who noticed the worried camel seller asked him about his plight. The passer-by advised him to act as if he is tying up the tenth camel just like he tied up the other camels and things should be fine. The camel seller did as advised and went to sleep.
In the morning, when he got up, he saw the tenth camel standing there along with the other camels. He untied the other camels and tried to pull the tenth camel, but it simply refused to move.
Confused and not knowing what to do, he stood there looking at the camel, when he realized what he had done last night. So, he went up to the 10th camel and acted as if he was untying it and the camel started moving.
The tenth camel was conditioned to believe that he too was tied up just like the other camels, which is why he refused to budge.
Classical conditioning refers to learning through association and was discovered by a Russian physiologist Pavlov. In simple words, two stimuli are linked together to produce a new learned response in a person or animal.
Now if you thought, classical conditioning is relevant only for camels and other animals, let me tell you – this is relevant in humans as well.
Now you may be thinking – how this is applicable in the parlance of investing in the stock market?
During my interactions with many investors in the month of March, I came across many investors telling me:
And now? So, when I called them up in April, here are a few statements that they share with me:
Now, these reactions are from those investors who tried to catch the lows but failed while waiting for the market to bottom out and missed out on the opportunity to invest when the markets started recovering. In short, these are reactions from investors who attempted to time the market.
Time and again, stock markets have offered many wonderful opportunities in the form of market corrections to investors. Sadly, many of these wonderful opportunities are missed by the majority of the investors in their attempts to chase the market highs or lows, i.e. the time the market.
So, if you are wondering as to why investors try to time the market, it has got a lot to do with the conditioning of the mind.
Now let’s see how classical conditioning relates with timing the stock market…
When markets are in a correction mode, investors panic and sell their stocks anticipating further fall. Some investors go a step ahead by liquidating all their equity investments and shift to traditional investments such as Fixed Deposits, Gold, PPF, etc.
The best example of this is the recent market correction triggered by the Coronavirus pandemic in the month of March 2020.
What happened later? Sensex recovered by 22-23% after that.
In both these cases, markets have been extremely volatile, which evokes the emotion of saving our investments or making more by timing the market, triggered by past experiences or the overall market sentiment (negative in this case) which triggers such an action.
Here’s what you should do to get rid this of classical conditioning while investing in the market:
Invest only after detailed research in stock market:
Before investing in any stock, it is necessary to understand why you are buying it. To understand the right investments for your portfolio and financial goals, it becomes imperative to conduct a detailed investment process. Click here to read more about step-by-step approach to an investment process. With this, it is essential to check the financial health and the future growth prospects of the business before investing in it. This will boost your confidence, as you know the actual reasons which will bolster the growth of your investment.
Invest in tranches in the stock market:
This is an proven way to reduce your risk . When you invest in installments, you can take advantage of cost averaging, which works best for cautious investors.
Avoid greed and fear at any cost in the market:
Don't rush to buy stocks because the stock market is in a bull run or sell a stock when the stock market has turned bearish. When you invest in the right companies,they can withstand any kind of volatility and outperform with time.
As aptly said by Benjamin Graham "Individuals who cannot master their emotions are ill-suited to profit from the investment process."
To conclude, it all comes to how you react to the fear. Creating wealth from stock market is not a breeze. There will be ups and downs. Investors should be prepared to stay invested for long term gains by ignoring short term losses.
And lastly (and most obvious), don’t time the market. Rather than that – trust the market. If markets have rewarded many investors in the past, there’s no reason it would not reward you if you:
- Remain patient
- Adopt a systematic approach
- Take research backed decision
Just to give you good news: If you regret missing such opportunities in the past, don’t sulk! Markets are generous, and they will present many such opportunities in the future as well to create wealth. So, the next time when markets are correcting, instead of saying ‘Oh no, why?’, tell yourself ‘Oh yes, amazing!’ and go on a shopping of high-quality stocks at discounted prices. And if you’re scared about the uncertain times ahead, I already gave you the trick to overcome it. Yes, it is buying in tranches over the next 4-6 months to take advantage of rupee cost averaging.