As a child, I once remember, burning my tongue in an attempt to drink a hot glass of milk.
The impact of the incident was so strong on my mind that for the next few years, I would examine everything which looked like milk carefully, before drinking. And that included curd too.
We all have such experiences about fear ruling our minds at a certain point or other time whether it is fear of heights or insects.
To understand fear in human beings, behaviourist John B. Watson and Rosalie Rayner conducted a famous psychology experiment titled the “Little Albert” experiment.
The participant in the experiment was a 9-month-old child Albert, who was exposed to a series of stimuli including a white rat, a rabbit, a monkey, masks, and burning newspapers. The boy initially showed no fear of any of the objects he was shown. With this, Watson started marking his reactions by striking the hammer against a steel bar when Little Albert got terrified to the sound of the sudden noise and burst into tears.
After a few months, the next time Albert was exposed to the rat, Watson made a loud noise by hitting a metal pipe with a hammer which made the child cry. After repeatedly pairing the white rat with the loud noise, Albert began to cry simply after seeing the rat.
After conditioning, Albert feared not just the white rat, but a wide variety of similar white objects as well. His fear included other furry objects including Raynor’s fur coat and Watson wearing a Santa Claus beard.
The Little Albert experiment had revealed that emotional responses like fear could be conditioned in humans. The above experiment depicts the phobia, which an extreme or irrational fear of or aversion to something.
This phobia or fear has two outcomes. Forget everything and run or face everything and rise.
It is quite common to find investors who shun stock market investing on the basis of the phobias.
In fact, 90% of people react with fear after making a loss in share market.
Majority of people who lose money end up blaming the market or their luck and exit from the stock markets never to invest again.
But then will this response to fear enable “wealth creation”?
Studies have revealed that human nature is not designed to accept losses. For example, the emotion of losing Rs. 500 will be more than earning Rs. 500.
Thus, investors who make losses in equities, react with flight than fight response. However such escapism will result in missing out the opportunities to generate wealth in the long term.
The fear of making losses prevents investors from making new entries and exits that can prove beneficial in the long-term.
For example, investors tend to exit stocks that are doing well due to the fear of correction and tend to hold on to stocks which are making losses.
We spoke about 90% of investors who prefer flight when gripped with fear. Now let’s take a look at the minuscule percentage of investors who choose to fight in the same scenario.
The best example is the huge correction of 2008. As the market started to dip, the majority of investors started becoming nervous.
When the markets fell further, panic gripped the investors who started losing hope. This sparked off a series of massive sell-off with investors trying to salvage whatever was left in their portfolio.
But investors who remained invested or made fresh investments during the correction phase made huge profits when the markets recovered and touched new heights.
The below table will give you an idea of how much wealth an investor would have gained if he had invested during the crisis of 2008.
So, in the end, it all comes to how you respond to the fear. The stock market is not an easy way to create wealth. There will be ups and downs.
As rightly said by Benjamin Graham “Individuals who cannot master their emotions are ill-suited to profit from the investment process.”
Investors should be psychologically prepared to remain invested and have the patience to bear the temporary losses for long term gains.
The below steps will help you overcome your fears of the stock market:
Invest only after detailed research:
Before investing in any stock, it is important to understand why you are buying it. It is very important to check the profitability, debt and future growth prospects of the company before investing. This will give you confidence, as you know the actual reasons that will bolster the growth of your investment.
Look for value picks:
It is very important to buy the right stock at the right price. No matter how attractive a stock is, or visionary its management is, it is absolutely critical that you buy it at the price that is below its intrinsic value.
Invest in tranches:
This is an effective way to reduce your risk exposure. When you invest in tranches, you can take advantage of cost averaging which works best for cautious investors.
Avoid greed at any cost:
Don’t be in a hurry to invest because the stock market is in a bull phase or exit a stock when the stock market is in correction mode. When you invest in the right opportunities, it can withstand any kind of uncertainty and outperform with time.