Mr Market is Full of Uncertainty, What Should I Do?
As an investor, don’t you face the uncertainty of the capital market the same way you meet your crush’s feelings? It just likes “Today, I want to invest while the stock price is going up”, but after you had bought it, the price went down. Then, its price went up again the following day and dipped down in the afternoon. The following day it plummeted, and the next day it climbed up again. Finally, “Ugh, what should I do?”
If you feel that way, let’s learn how to deal with the uncertainty of Mr Market, also known as the capital market, from this article.
The capital market is like a stock market, and it is a place where the transaction takes place. The difference is, in the capital market, securities such as stocks and bonds are traded. Stakes are sold by companies that require capital and purchased by investors, parties who own the wealth. The company first sold securities (stocks) to the public during an IPO (Initial Public Offering). At the time of IPO, the stock price will be determined by the securities company contacted by its company (underwriter). After the IPO process occurs, the price will depend on the demand and supply of stocks in the capital market, so there is a cycle like this in the capital market.
If the stocks’ demand increases while the number of stocks offered remains or even decreases, then the stocks’ price will also increase—Vice versa.
In the Psychology of a Market Cycle chart above, you can see that the lowest price of stocks is when investors initially do not believe the stock price will increase (disbelief). However, then investors begin to have hope (hope), be optimistic (optimism), believe (belief), and even start to invite other investors to buy the stocks (thrill) when the stock price was getting higher. Until the stock price reaches its highest peak, people believe that the stock price will still be getting higher (euphoria). The stock price will continue to decline until it reaches the depression point because many investors and other institutions sell their stocks when the price is still above the depression point.
If you notice it, the Psychology of a Market Cycle graph is strongly influenced by the mastery of emotions (psychology) and investors’ attitude. When the stock price is at its highest point, investors flock to buy the stock, and conversely, no one dares to buy the stock when the price is still at its lowest point. Likewise, when the stock price is at its lowest point (disbelief), most investors are afraid to invest, while when the stock price reaches the highest point, they will become greedy and no longer care about the risks.
This is very much in line with the following 2 points below that affect the demand and supply of stocks in the market cycle, which are:
1. Company’s fundamental relating to changes in company profits and debt cycles.
2. Mastery of emotions and attitudes (psychology) of investors towards risks in the capital market.
So, how do we know if the stock price is still too low or too high in the stock market?
1. Find out whether the market valuation exceeds what has happened in the past.
If there is no difference between the past and present market valuations, then the stock price is likely to be appropriate.
2. Pay attention to the attitude of the majority of investors in the capital market. Are they too pessimistic or too optimistic and full of euphoria? (Be fearful when others are greedy and greedy when others are fearful.-Warren Buffet).
When you believe that the capital market cycle is at a low point, you might consider forming a more aggressive portfolio by:
1. Invest more capital.
2. Invest in second-line stocks.
3. Invest in stocks that benefit from good macroeconomic momentum or conditions.
Conversely, if the market cycle is at a high point, it’s a good idea to form a defensive portfolio by:
1. Hold more cash.
2. Invest in lower-risk instruments.
3. Invest in strong fundamental and not cyclical stocks.
You can apply these tips and methods above when you manage your investment portfolio. However, for those who still need help & learn managing your portfolio, you can start investing in equity mutual fund or stock index fund while learning.