Market fall and investor's psychology – By Sidhavelayutham, CEO & Founder, Alice Blue

Bengaluru: A lot of people believe that if someone is good at investing, he/she will definitely be good at IQ and calculations. On the contrary, investors with an average IQ in this world have generated supernormal returns and created wealth just by controlling their psychology and making rational decisions at the right time.

It is very easy for negative emotions to rule over an investor’s mindset during the market fall. Usually, in this situation, investors panic and sell their holdings even without understanding the real reason for the fall. On the other hand, a lot of sensible investors see this as an opportunity to buy more at a much attractive valuation.

There is a famous saying - “Buy” when people are fearful and “Sell” when they are greedy. When the world was going through the worst health crisis of Covid-19 during March 2020, it must have taken a lot of courage to buy during that kind of a situation. However, the right decision helped a lot of average intellect investors made phenomenal return post that situation of extreme fearfulness.

Talking about the current scenario, there is an extreme optimism among majority of the investors, where all are expecting the interest rate to peak out soon, a growing economy is on the cards and any other positive macroeconomic situations one can think of. This has led to a situation where the market have been touching all-time highs almost each day now along with the smallcap and midcap indices hitting through the roof. For a rationale investor, it could be a good time to book out partial profits as there is a sense of extreme greed in the mind of the investors. The number of IPOs and its subscription also indicates greed with a lot of IPOs getting astonishing multi-fold subscriptions followed by a super premium listing.

As a long-term investor, one should always have a margin of safety in his/her mind. It is the difference between the current market price and intrinsic value of the stock. If you see there is a market fall happening, one needs to clearly see the margin of safety here, the difference between the current market price and the real intrinsic value. In fact, the rational investors wait for these opportunities to buy more as the stocks become highly undervalued during that time.

Additionally, a lot of mutual fund investors also sell out their SIPs during the market fall to protect their mutual fund returns. However, one should understand that SIPs are meant for the long-term where the law of average works really well. If the market falls and the SIP continues, one usually gets more number of units at a lower NAV. This helps in compounding returns over a longer period of time at a significantly lesser risk and monetary exposure during the market fall situations.

At the end, there will be multiple instances of market fall in the investing journey, one needs to be a rational thinker. One should understand that it is the temperament that supersedes intellect when it comes to being a successful investor.