Red Friday: Did you panic?

"Biggest fall in a day since May 2020" came a ping from my senior at work. The day is Friday, 26th February 2020, when I realised that we're lucky to witness the times we live in. Sitting remotely in our pyjamas, with our modesties barely covered, some of us witnessed the Mars landing. For those a bit more financially inclined, we witnessed the stock markets around the world soar to eclipse their previous highs. 

Then came today, the Friday. Pretty sure it shook a lot of people out of their hazy optimism. Because when the markets fall, Mamacita do they fall. Those invested in it for the long run needn't worry, or so I read. But those in for making a quick buck... god save them. But there's beauty in it, watching the candlesticks on the charts turn from red to green, then intermittently back to red, and the cycle continues. 

"You realise your true character when you're actively invested in the markets," says one of my mentors, often. Wise gentleman, calm as a placid lake, I bet he meditates his pants off. Because whose WhatsApp status reads "Trust is the only answer"? He says that the markets show you the mirror. You get to know if you're greedy, an absolute wuss, or wise enough to last while others perish. Apparently, most perish.

The markets have been on the tenterhooks for the past fortnight, and I say this as a layman. I'm no analyst. The so-called "irrational exuberance" has given the underlying fear a face of sorts. The smarter ones saw this coming about six months ago, for all you know. But it's in such eerie times (purely my own way to see things, your reality may vary) when you wonder what to do. Do you pump in more cash, do you cash in your losses, do you hang on for longer, or exit out of profitable positions?

Exit stage

Tell you what, the toughest thing I found is to exit profitable positions. The psychology behind this problem is simple, too. You expect more out of a profitable position, you expect more gains. The emotions come in the way. It's the first red flag to watch out for, I believe. Logic keeps you afloat, emotions drown and drench you. However, for anyone out there facing a similar conundrum, yes, exiting a profitable position takes discipline. Yours truly says that after repeatedly failing to keep emotions at bay. 

What about a lossmaking situation? Now, this is a position that I need some time to figure my way out of. I think it's a common problem, too. We don't cash in our losses. We'll hold on, 'average down', and deploy other acrobatics to prevent realising a loss. I don't know why that is. I've taken a couple of punches to the chin, especially when I realise that my bets were on weak footing (read fundamentally weak stocks). 

On the other hand, when the market is in free fall, it pays to be on the lookout for good assets available at cheap valuations. That's where profit booking comes in handy because now you have cash at hand to buy when there's a sale going on. Else, you remain too invested, with all your cash locked up. Not a good position to be in. For all you know, cash out, whatever little losses notwithstanding. That way, you at least make sure that you live to see another day. The post-script sounds good in theory but that middle path is painful to adhere to. 

P.S.: Somewhere between greed and fear lies the peace of mind of not giving in to either side.