Ideas & Debate

Double-edged sword that is hope in stocks

Hope can both be an enhancer of trade at the stock market and a source of painful losses depending on the outcome of ones investments. FILE PHOTO | NMG
Hope can both be an enhancer of trade at the stock market and a source of painful losses depending on the outcome of ones investments. FILE PHOTO | NMG 

Ask a Fibonacci enthusiast about when they think the blood bath will stop and they’re likely to mention 3,458 points as the destination, a 15 per cent stop from the markets recent peak.

Reason; the 50 per cent retracement rule dictates it. Meaning the interim correction has about 300 points to go on the way down before markets bounce back.

Ask a fundamentalist the same question and they’re likely to say that the valuation correction is an attractive buying opportunity. Reason; the “buy the dip” mentality commands that you buy cheaper.

Notice that despite being fundamentally different - the former has a timing element while the latter lacks one –, both styles are saying the same thing; the current weakness is a time for “stocking up” and not down. Now here comes the revelation; human beings are awfully hopeful. In today’s article, we look into this subject.

But what’s hope?  According to the Merriam-Webster dictionary, to have hope is to expect with confidence. In this case, one may say that investors are hoping for a rebound. But is hope an investment strategy? You’re right, it’s not.

Last time I checked, the market danced to its beat. Going wherever it chose. No amount of hoping can influence it or determine its next move.

Granted, hope is a component of a healthy state of mind, and opposite of negativity that we see all around. But then, when it comes to the stock market, hope is dangerous.

It hurts to see investors investing in companies that are proven losers (not mentioning names) and hoping that this time it’ll be different. Markets don’t work like that.  

However, a little hope is good. If everyone turned negative, who would want to buy? If the market turned “hopeless”, then it would cease to exist.

Hope is, therefore, an important force behind the stock market. In fact, to a considerable degree, one may even say that transactions at the bourse are bets of hope; an expectation of a brighter tomorrow, a profitable future and promising days to come.

What’s more, as human beings we can’t get away from our emotions. That’s part of our DNA. And so our hopes and dreams are tied up in our investments. They are on our minds when we place those trades.

That said, hope is a dangerous emotion. It’s known to destroy portfolios. Hope is a big money-loser in the stock market.

For it is hope that keeps you from selling your losing stocks. It is hope that stops you from cutting your losses before they get bigger. Indeed, emotions keep us from doing what’s right.

So the big challenge for any investor – or any emotional being – is to get beyond them.

To begin with, there are many good investment strategies to pick from: buying cheap stocks, macro, trend following, top down, bottom up, to name only a few. Notice hope is not among them. Pragmatism is the only way. I hope you see the point.