A Young Perspective Towards "Fear and Greed Index"

 


The Fear and the Greed Index are used to understand the Investor Sentiment. This is developed by CNN Money. This helps in Gauging the Market Sentiment as well as Fair Pricing of Stocks. In general, the logic goes like this (which I assume every Amateur Investor will also understand) that Fear will take the Markets Down and Greed will take the Markets Up. I don’t want to write in detail regarding these Indexes as all information is available online these days. But I would definitely comment on the practicality.

The usual quote goes that when “Markets are Greedy, be Fearful and when Markets are Fearful, be Greedy.” This is actually correct but not all investors are able to follow this. They become Fearful when Markets are Fearful and Greedy when Markets are Greedy. The concept of “Buy Low and Sell High” which is very famous is also very difficult to follow.

Now I would like to focus upon my Style of Investing during extreme Fearful Markets or Greedy Markets. I hope it helps other investors to not fall victim of their emotions and be as rational as possible.

First a few points regarding Myself & My Portfolio. I am an Ultra Long term Investor. I am at the age of 26 so I have a Longer time Horizon than most investors. I mainly focus on Midcaps, Small caps and Microcaps (M-Cap below 1000) that have the potential in the future (5-10 years) to turn their Market Caps on the higher side (E.g. from Microcap to Small Cap or from Small Cap to Midcap). I only keep myself limited to stocks that are very Strong Fundamentally (no matter what their M-cap is). If they tick most of the boxes on my Equity Checklist, then only they enter my Watch list.

One important point to note when working with Small Caps/Microcaps is that a very sharp one-sided turn is possible in these stocks. These stocks have very low volumes in a single day so a sharp move is very much possible. Due to these characteristics of stocks, in a very greedy market a sharp rise in these stocks is possible wherein an investor should not get greedier and buy the stock in huge quantities at that time in the anticipation that it will rise. These stocks are usually the last ones to rise in a greedy market and the first ones to fall in a fearful market. When the market is fearful, a sharp fall in these stocks is also possible. So an investor should also be careful while averaging the stock (adding more or entering the stock) during these times. In both cases of the market sentiment, the stock should be bought/sold in a phased manner with a time gap. This is a very necessary step when dealing with Small Caps/Microcaps.

As I am an Ultra Long term Investor with a focus on Fundamentally Strong stocks, the number of times I push the Buy/Sell Button on the terminal is very low. I don’t even look at the markets on a daily basis. I usually enter a stock with a testing position (very small position as compared to my overall portfolio). Increasing/Decreasing my position in that stock depends upon a few factors.

1.       Is the overall market in a bull run/bear run/sideways?

2.       How is the stock performing as compared to the overall market? Is it in the same direction or in the opposite direction?

3.       Is there some stock specific factor affecting the stock to go in the opposite direction?

4.       How is the Market Sentiment overall?

I answer all of these questions on regular intervals that is monthly/quarterly.

If the overall Market Sentiment is Greedy, I would prefer to Book some Profits if I feel that the stock is also topped out Price Wise. But I would definitely not get out of the whole position and keep some quantity because I am convinced that the stock is good fundamentally and help me track the position. This helps me in generating cash for when the markets are fearful and I can buy the same stock at a lower price than my original sell price. I would not be fearful in entering the same stock at a lower price if there is no big fundamental change. I would also exit stocks which have lower losses in order to generate cash for when markets become fearful.

If the Market Sentiment is Fearful, I would prefer to enter/increase my position in the stock that I am convinced is a Fundamentally Strong Stock. The concept of “Buying the Dip” is something that I definitely apply but in a phased manner so that I do have cash when I want to buy a stock in which I have a high conviction.

In this way, I keep my positions in certain stocks ongoing and increase them when I feel it is the right time and right value.

Hope this helps Newbie Investors to help Gauge the Sentiment of the Markets and Behave accordingly!!!

References: 
CNN Edition(fear and greed)

Kotak Securities(greed and fear cycle)

Investopedia (fear and greed index)

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