Dear friend,
At the outset, I would like to say thank you for staying subscribed to The Ledger. This newsletter, which was only sporadically/randomly updated until now, will now appear in your inbox once a week, on Wednesday. For more posts on personal finance, please do check out my blog, Pennmoney, which is updated regularly.
Got stocks?
Last week, I’d attended a webinar on investing where the expert speaker made a stray remark about how the volume of activity in the markets right now reminded him of the Harshad Mehta days. The exact word he used was frenzy.
And frenzy, is not an exaggeration.
The number of new demat accounts (necessary for trading in the stock market) reached a record high of 14.2 million in the Financial Year ending March 2021. Close to 9 million of these accounts were added in between August to March. To put things in perspective, the total number of new accounts opened in the previous financial year were 4.9 million.
So, how did this happen?
There are three broad reasons that explain why this interest in the stock market exploded among Indian investors:
Fintech Innovation - This rise is in line with the mobile penetration in India and the fintech innovation that’s been sweeping the country, which is evident in the amount of advertising dollars that were splashed on investing apps through the IPL. While a number of different apps were advertised, all of them promised the same thing - that investing was as easy as, if not easier, than getting on an escalator. The fierce competition among these players also ensured that investing in the markets was cheaper than ever before.
COVID-19 - The pandemic robbed a lot of us from our usual social distractions. As a result, not only was there some extra time in all our hands (parents of young children, feel free to disagree), but also greater savings. Add to this the general dread and helplessness that everyone felt during this time, the need to save & invest was greater than ever before. For those who’d lost their jobs, the share market also presented itself as a solid source of income.
Fear Of Missing Out - Ah, FOMO. TV ads on investing that played every 5 minutes during the country’s biggest sporting event, influencers collaborating with investing platforms, the Game Stop stock squeeze that took over the internet and the constant news about the Indian market’s bull run in what should have been an incredibly depressing economic period snowballed into the ultimate FOMO machine.
The dangers of FOMO investing
Behavioural Economics legends Daniel Kahneman and Amos Tversky pioneered the study of FOMO. They suggested that people are twice as affected by the pain (or the perception of pain) of losing than the pleasure of gaining. So you could have a day job, but if you see your friend making money in the markets, you feel like you’re missing out. And so you want to step in and make money too.
What’s more, the stories that surround investing today aren’t about numbers or technical analysis. It’s about empowerment & taking control of your finances. The ability to control your share market purchases, for example, was a power only professional brokers had before fintech players entered the scene. Now, everyone’s an investor. And with this narrative come the stories of success, returns and plain euphoria that have all translated into a booming market that bears no resemblance to the country’s crumbling economic indicators.
But when it comes to investing, timing is everything. FOMO investing often sees investors put money in at a time when the markets are already peaking. What’s more, FOMO investing doesn’t take into consideration your needs as an investor and is driven by the blind lure of easy money.
So what follows euphoria is a steep fall and unnecessary heartbreak.
This heartbreak isn’t exclusive to the equity markets. Any market that involves excessive hype (here’s looking at you, crypto), should be approached with caution and apprehension.
Ask these questions before you invest
Why am I interested in investing in this? Is this because of what I’ve been reading/hearing about it, or because I genuinely believe (and have data) that talks about its potential?
Investing directly in the markets & day trading to earn a passive income feels like it could be a breeze when your friends and internet people talk about it, but it isn’t advisable to step in unless you’ve a basic understanding of how the system works and all the risks it holds.How much should I invest?
Going all in might promise great returns but it could also result in you losing everything. Starting small and staggering your investments across time will ensure that you build your portfolio in a steady way.Does this money belong somewhere else?
The idea that you can make more money (FOMO!) can result in you diverting funds that would ordinarily be put in other investments into this investment. This could actually result in an even more painful loss where you lose the return from the original investment as well as your hype investment. Disturbing existing investments for the sake of something new is not advisable. Instead, look to add to your existing portfolio in measured amounts.
Is everyone making money but me?
The pressure to participate in the great stock market/crypto/next big thing boom can be intense. But remember that it’s propelled by hype. And hype rarely makes bank.
Thank you for reading! I hope you found this useful. I will write to you next week. In the mean time, please do check out Pennmoney for other money related posts.
Best,
Lavanya