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Confessions of a Guilty Analyst

Apr 13, 2018

Ankit Shah, Research analyst

Some of you, dear readers, would know I've a deep interest in the workings of the human body and mind.

How do we harness the knowledge and findings of neuroscience and human psychology to make a killing in the stock market?

Today, I'm going to make a confession...

On many occasions I've told you, dear reader; never try to predict the direction of the stock market. I admit there have been moments when I've been guilty of doing just that.

When markets are falling, or lingering sideways, I sometimes find myself anxious. My mind tries to anticipate the start of the next bull rally.

And on some occasions, when the markets are in a bull run, my mind races to predict the next big correction.

It's crazy!


Honestly, the rational part of my brain knows very well it's futile to anticipate every market movement and to make sense of every new piece of information. I would be better off staying focused on the bigger, safer, long-term game of value investing.

But it's easier said than done.

I can't deny there is a child-like part of me, anxious and often irrational, that attempts to hijack my rational thinking.

This part of my brain compulsively tracks stock prices, searches for news and information to validate my pre-existing beliefs, and makes arbitrary guesses about the next direction of the market.

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In this context, I'd like to share a small excerpt from a book I deeply treasure - Job's Body: A Handbook for Bodywork by Deane Juhan.

The book is obviously not about investing and stock markets. However, I believe the insights it offers are truly precious gems for every investor.

This passage talks about our constant, compulsive attempt to find certainties in a world full of uncertainties [emphasis mine]:

  • 'Now there is a specific feeling which has for millennia tantalized us with the promise of doing away with anxiety once and for all, and that is the feeling of certainty. Certainties are warm, dry shelters in the storm.

    Even certainty of the worst commonly relieves the shapeless dreads of anxiety; there is a peace in not having to wonder and struggle after answers anymore that seems to be able to surpass the fear of doom itself.

    Anxiety can cloud my thoughts and suspend me in a helpless paralysis, while a certainty - no matter how small or how grim - lends me a basis for decision and action, a concrete relation to my fate.

    We have therefore a strong tendency to bend all our capacities toward establishing and guarding certainties, and once we have tasted it we have a compulsion to invest all our observations, theories, and beliefs with this feeling, so that they will become potent against our anxiety as well as satisfying to our intellectual curiosity.

    And, of course, the more collective agreement there is concerning "certainties," the more emotionally potent they become.'

    ...

    'Unfortunately, if the history of mankind, or even of modern science, has any lasting certainty to offer us, it is the fact that it is entirely possible for rational individuals to be absolutely certain about notions which later prove to be utterly preposterous.

    Nothing is certain except that our certainties about the ways of the world will change, and with them our ideas about how to cope with the conditions within and around us. This is the case not because we are hopeless ignoramuses, but simply because the urgent emotional necessities which push us toward establishing a sense of certainty seldom allow us the large amounts of time necessary to assemble all the relevant facts.

    We must escape our pain, quiet our fears, and we must act, today, now. For this reason, we are always tempted to adopt beliefs and to defend them staunchly as truths, because the possibilities which they imply profoundly soothe our anxieties and produce some measure of practical results, rather than because their actualities have been borne out by unequivocal proofs or continue to offer the very best solution to current problems.'

So, there you go...

I know I'm not the only one chasing 'certainties' in the stock market. We're all constantly trying to make sense of an increasingly confusing, noise-filled, uncertain economic reality.

With the unprecedented influx of news and information 24x7, and the capricious moods of Mr Market, the human mind often finds itself grappling with a lot of nervousness, anxiety, and overthinking.

Now, my aim is certainly not to make you more anxious about your anxieties.

What to do, then? Is there a way out?

Yes, there certainly is.

The trick is to befriend uncertainty.

I'll show you how.

But first, let me ask you a question.

Why don't you put all your money into fixed deposits? You will have certainty about the return as well as capital protection.

The reason people invest in stocks is because they know there is great potential to make compounding returns and build a lot of wealth.

But why does Mr Market reward you with returns significantly higher than fixed deposits?

It's because you agree to accept uncertainty of both capital as well as return.

So, effectively, what Mr Market seems to suggest is that accepting uncertainty elicits a bigger reward.

But does Mr Market reward every investor equally?

Not at all. In fact, most investors tend to make average returns. Some even lose a lot of money.

Only a few investors become truly rich.

The truth is that most investors like to buy stocks when there is a sense of 'certainty' in the market. They get nervous the moment 'uncertainty' sets in.

But it's during such moments of 'uncertainty' the biggest investment opportunities arise. These are the times when stock prices are low.

If you embrace 'uncertainty' instead of resisting it, you will scoop up wealth creating opportunities and build a fortune.

Chart of the Day

During the financial year 2017-18, the BSE Sensex delivered a return of about 11%. Blame the market correction that started in February for the modest returns.

However, the BSE IT index gained over 19% during the same period. Now, that's a significant outperformance. If you were holding some solid IT stocks last year, you have most likely fared better than the Sensex.

But last year, the markets were not as optimistic on the sector as they are now.

Look at the chart...

How It Paid Off to Bet on the Uncertainties in the IT Sector

During the first half of 2017-18, the IT sector was among the underperformers, and it was lagging way behind the Sensex.

During the first half of 2017-18, the IT sector was among the underperformers, and it was lagging way behind the Sensex. In fact, until October 2017, the index was still hovering near levels seen in April 2017.

But once the mood of the market changed, the IT index not only recovered, but went on to outperform the Sensex.

In my premium newsletter Insider, the IT sector was my top pick since we launched the service in July 2017.

Now, the question is...

What gave us the foresight to recommend so many promising IT stocks?

I'll tell you the secret...

Last year when I had discussions with my fundamentals-based research team, I got a clear sense that the uncertainty and negativity surrounding the IT sector -- the H1-B visa problem, the global slowdown concerns, strengthening of the Indian rupee, high attrition rates, etc. -- was blown out of proportion. There was a good contrarian opportunity to buy 'uncertainty' when the markets were fearful of IT stocks.

Like I said earlier, it is during moments of 'uncertainty' that lucrative investment opportunities are created.

Happy Investing,
Ankit Shah
Ankit Shah (Research Analyst)
Editor, Equitymaster Insider

PS: Every day the markets are open, Ankit Shah cherry picks one idea from our 9 premium publications, the one he considers the best money-making opportunity. This one idea is then shared with an exclusive group of readers on Ankit's 'Insider' list. Today, you have the chance to join this exclusive group. But you must hurry! This is a limited period offer. Full details here...

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