When fear and greed take over

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Shafiqul AlamIn 1996, only a few available shares were aggressively bought by people in an over-heated market and though efforts were made to stabilise the market it was too little and too late. Bubble formed and collapsed where only a few traders and market manipulators, who had inside information, gained while general investors paid the price heavily. The fear factor "fear of losing" had such a lasting effect on the investors that the Dhaka Stock Exchange (DSE) general index rarely crossed the 1000-point mark up to 2004. The market was rather under priced and thereafter the DSE index gained progressively. However, the market trend became bullish especially in 2010 and this bullish mood of the market attracted an increasing number of small investors to the market as a real alternative to mobilise funds for investment, moving away from the traditional dependence on the banking system. To limit investors' fund flowing into these already overheatedmore than saturated shares and help the market cool down, the Securities and Exchange Commission (SEC) tightened the conditions of margin loans and fixed maximum market exposure of banks at a time (later part of 2010) when the banks' investment was more than the limit. As banks started to off-load shares quickly, price started to fall. Fear grasped people and they started to off-load shares as well. Let us think one side of trading --- when a trade goes shocking, the regret and frustration can carry over into the next trade. In the worst case, the fear is so appalling that one may not enter into his next trade. The other side of trading ---- with a couple of consecutive pleasing trades, the ego can be enlarged and one can feel himself unbeatable. This would eventually lead one to such kind of trades that he normally would not have entered in to. When stocks make strong moves to the upside, greed from all the cumulative market participants joins the move that leads to upward movement of index. This particular problem is fuelled by the expectation that every trade one enters should be money-spinning. But the fact is - not every trade will be profitable. And the tragic thing is that the stock prices usually fall faster then they go up and when this happens, fear touches all the participants. Despite reaching an exit price, many hold on because greed is by their side in that there would be a further increase. Next day a heavy selling might start but still greed suggests one to hang on. The price keeps going down rapidly and subsequently, fear starts to grow. But by the time, it is too late and one's nice profit has turned into a loss. Again, when stocks suffer huge losses for a sustained period, the overall market becomes more fearful of sustaining further losses. But being too fearful can be just as costly as being too greedy. DSE is now experiencing the same thing. Investors, in a bid to stem their losses, are searching every option to move out of the market quickly. Today, our investors are scared, overrun by a fear of sustaining further losses. Losing a large portion of one's investment is really hard to digest. Once who were forced by greed factor to earn profit within the shortest possible time, are now forced by fear factor to sell shares to minimise their loss as much as possible and as such, market is going down instead of stabilising even after ten month of the nasty collapses. Recently, Bangladesh Association of Bank (BAB) has announced to inject fund to stabilise the share market which has been going downward almost throughout the year. However, even this fund could not arrest the downward trend of the market as the fear factor has become dominant. Many people suggest traders to rely on fundamentals of shares but do the traders really bother about fundamentals of shares? There is an old saying on Wall Street that share market is driven by just two emotions: fear and greed. Succumbing to these emotions can have a deep and detrimental effect on investors' portfolios and the stock market. One might be saying that greed and fear will never get in the way of his trading, but greed and fear always will be in trading. It is not something to be ashamed rather it is something one has to admit. The writer can be reached at email: shafiqul0032@yahoo.com