Psychology of an Investor. Is there a way to master it to always win?

Let me start answering this question with another question — Are markets driven by sentiment?

All market participants are driven by sentiment and hence the markets reflect the same. So is there a way to understand how does the market think? If yes, is there a way to master it to beat it at its own game?

Lets start by first trying to understand how does the market think.

Broadly there are five stages to any market cycle as shown in Figure 1. One can further sub-divide each stage into numerous mini-stages to understand it better, but for this read I shall stick to the broad categories.

Phase 1: New Bull run & Uninformed Early Exit

During the initial stages of a new Bull Run, the market is still coping from the previous bearish cycle. Only a few veteran participants understand the true importance of a bearish cycle and use it to their advantage. Majority of the participants are still engulfed by fear and hence do not have faith that a new bull run has begun. These early investors still wary of the precarious sentiment get out of the market too early with limited profits — Uninformed Early Exits. During this early phase of the new bull run, the vast majority of the investors are still not confident to invest and hence just wait and watch. The fun part starts after this phase.

Phase 2: Bull run confirmed & Investor Euphoria

In this phase, the early exit investors from phase 1 become very confident due to their profits and create the hype of a new bull run. This hype spreads like wild fire and now a new set of investors enter the markets to make profits along with the first set who put in more capital and their new profits to make further gains. The thought of the recent bearish run vaporizes, and it seems impossible that the market can go anywhere but UP.

It is during this phase that the toughest emotion an investor faces suddenly creeps up — FOMO. This stands for Fear Of Missing Out (FOMO). When an investor gets engulfed by the bull run hype via media, friends, family and the headlines that the markets are making new highs everyday, they succumb to FOMO. They DO NOT WANT TO BE LEFT BEHIND!!! This is where all the mistakes occur.

Let’s understand this with a real life example. Say you’re out shopping for a new BMW and you visit a car dealer and find out the car is priced for $150,000. Instinctively, you would visit another dealer to see if they can beat that price, correct? You’re hoping to get the car cheaper than $150,000 rather than above that. So, after some research you find out that in a couple of weeks there would be heavy discounts for the same car, so you decide to wait and observe. When the discount offer finally arrives, the same car is now priced $130,000, but you’re a smart informed buyer so you start to negotiate further. After some negotiation you are able to get an even cheaper price of $120,000, but you’re a very smart and informed buyer so you get a few more quotes from other dealers and realize that the car sales have been dipping for a while so an even bigger discount is in the offing. Your patience gets well rewarded when you hear in a few weeks time that a further discount is being offered on the same car so you decide to buy it at $110,000 as you consider that to be the best price. All of us have gone through this process whether shopping for cars, electronics or clothes (reminds me of Boxing Day sales in Australia). We want to get the cheapest possible price at the heaviest discounts to purchase a new asset. Then why do we get interested in entering the markets when everything is becoming more and more expensive? Let’s understand this visually –

In figure 2, I’ve shown how the price of the BMW gets cheaper and we get more and more interested to purchase it — but doesn’t this looks like a graph of a bear market? If I simply change the name of the asset from BMW CAR to the stock symbol of Apple (APPL) during a bear market (Figure 3), would you still consider buying it? Probably not. But instead during a bull market, when the stock is becoming expensive every day, the investor gets tempted to buy it at the worst possible price. This is credited to FOMO.

The smart and informed investor is thinking of getting out of the market with their gains during this time. But how do you become that smart and informed investor? This requires a lot of experience, education and expertise; hence many investors lower their risk by investing with experienced money managers.

Phase 3: Peak of the Bull Run & Investor Anxiety

Up until this phase the bull ran has been running for a long time and participants do not even think to consider that it may have peaked. When the market starts showing minor signs of correction, the optimism overthrows any logical thinking and they start getting controlled by emotions. Anxiety is the first emotion to kick in. The investor starts getting a little worried but is still very optimistic as they can only see the potential profits, they refuse to acknowledge that they maybe in trouble. Optimism is at such high intensity at this stage that even though they have lost any minor profits they had made and have an overall net-negative portfolio they still hang on and refuse to cut losses.

Phase 4: Onset of the Bearish cycle & Investor Denial

FOMO investors portfolios are already in net-negative during this phase and the investors who are still in some profit do not wish to exit as they got used to seeing a bigger profit in their portfolio. The later investor refuses to see reality the way it is and still hangs on as they are so confident that the bull run is still on. This refusal to see things the way they truly are is the denial phase. Investors simply refuse to believe that they could have been wrong about their investments. As a result they pay a heavy price.

Phase 5: Bearish market confirmation & Panic

A new hype spreads in the market participants just like in phase 2, but this time it causes panic instead of euphoria. FOMO and denial investors are in panic mode and have lost most or all of their capital and exit the market empty handed.

Due to the cyclic nature of the market, we again start from Phase 1 post this.

We can see the same cycle in action in figure 4 with bitcoin.

Is there a way to safeguard oneself from these phases? Can we get rewards from the bull run and not get effected by the bear run?

Would it not be a dream come true if somehow an investor gets insured for their investment? So if their investment rises they get the gain, but if their investment depreciates their insurance kicks in and protects them?

The big players achieve this by hedging their investments, hence the name — Hedge Funds. This way they always make money. But what about the retail investor? How can they achieve such immunity?

BookMyGain, is the world’s first such company which allows the retail investor to achieve this. They do so via their revolutionary Smart-Swaps contracts. This is a fixed-term contract made between the investor and BMG. Essentially, the platform swaps an investors’ asset at its current market price for a pre-selected currency. Once the time period is complete, the investor then has the option to buy back their asset at that original price.

If the price of that asset has increased dramatically in value since then, the investor will not suffer a loss as they will be able to buy it back at a fraction of the current price. If the value has decreased substantially, the investor essentially sold at the right time and can even use their funds initially received to buy more of a certain crypto at a lesser cost.

Lets understand this with an example.

John Smart-Swaps his Bitcoin when it has a current market value of $10k, which he receives into his BMG Vault immediately allowing him complete access to his funds at 0% interest and no monthly payments. After the tenure period, the price of Bitcoin has dropped to $5k. John can either use from his $10k to buy more bitcoins, or he could keep his funds and rest easy in the fact that he was safely protected from a $5k loss on his investment. This way John avoided FOMO and Phase 5 panic exit. He became a smart and informed investor due to Smart-Swaps. He was made completely immune to the bearish run.

Alternatively, Bitcoin’s price could have increased to $15k. After the stipulated period, John now has the option of purchasing his bitcoins back at the initial price of $10k, thereby essentially scoring $5k or get the new gain in the currency of his choice in his bank account. This way, John only wins and never loses.

If you’d like some more information, visit their site or have a look at their whitepaper. You can also connect with them on Telegram to be the first to know about any new developments.