Understanding Markets. Understanding ourselves.

A collection of essays on investing, psychology and decision-making.

Have you ever come across a stock that seems to be everywhere?

It dominates social media. Business channels can’t stop talking about it. Newspapers are full of stories praising the company. Every investor around you seems to own it. Suddenly, it feels like you’re the only person who missed the opportunity.

That’s when FOMO kicks in.

Our brains are wired for social validation. When everyone around us believes something, we instinctively assume they must know something we don’t. Thousands of years ago, following the crowd was often a survival instinct. In the stock market, however, that same instinct can become incredibly expensive.

You convince yourself that the company can do no wrong and that its future is guaranteed to be bright. You buy the stock—not because you’ve studied the business, but because everyone else appears convinced.

More often than not, this is where trouble begins.

Beneath all the numbers, charts and news headlines, the stock market is ultimately driven by just two emotions: fear and greed. Much of what follows—news articles, analyst reports, valuation narratives and social media discussions—is often an attempt to justify one of these emotions.

Let’s take a simple example.

Imagine Stock A is trading at a P/E of 20.

One group of investors believes the company is capable of growing far faster than its peers. To them, a P/E of 20 looks cheap.

Another group believes the market has already priced in all that future growth. To them, the same P/E of 20 looks expensive.

So who is right?

More importantly, what should you do?

This is where markets become fascinating.

There is no universally correct answer. A stock can simultaneously look attractive to one investor and expensive to another because every investor has different assumptions, expectations, risk appetites and time horizons.

The biggest losses in the market rarely happen because investors fail to understand valuation models. They happen because they borrow someone else’s conviction.

Suppose you buy a stock simply because it is the hottest topic on television and the front page of every newspaper.

A few weeks later, the excitement fades. The stock corrects 15%.

What happens next?

If your conviction came from headlines rather than research, fear quickly replaces greed. Human beings experience the pain of losses far more intensely than the joy of gains. A temporary decline suddenly feels permanent. The very investors who confidently bought the stock at a higher price now desperately want to sell it at a lower price.

You exit.

A month later, valuations become reasonable again, business performance remains intact, and the stock starts moving higher.

Now FOMO returns.

You buy again.

The stock corrects once more.

The cycle repeats.

Almost every investor has experienced this vicious cycle at least once. Ironically, the stock was rarely the problem. Our psychology was.

This is why conviction is often the difference between successful investors and unsuccessful ones.

As equity investors, we don’t get paid simply for identifying good businesses. We get paid for enduring uncertainty. The ability to digest temporary losses and sit through irrational price movements is not optional—it is part of investing.

In fact, volatility is often a blessing in disguise. It presents some of the best opportunities for investors who have done their homework.

Even the best investments rarely reward investors from day one. In the short term, prices move because of demand and supply. They can rise or fall for reasons that have very little to do with the underlying business.

For the fundamental story to eventually play out, an investor must first survive this volatility. And surviving volatility becomes almost impossible when your conviction is borrowed.

True conviction comes from understanding the business, knowing why you own it, understanding the risks involved and buying it at a price that offers a reasonable margin of safety.

When you know what you own, why you own it and what could make you wrong, temporary market fluctuations become much easier to live with. Your decisions are no longer anchored to price movements but to your understanding of the business.

Of course, conviction is a nuanced concept and is often confused with stubbornness. But that’s a discussion for another day.

Successful investing is rarely about having the highest IQ or the most sophisticated valuation model. It is about having the emotional temperament to stick with a well-researched investment through periods of uncertainty. Conviction gives you the emotional strength to remain rational when fear and greed try to pull you in opposite directions. Perhaps that’s why one of my favourite investors, Peter Lynch, once said:

“The key organ for investing is the stomach, not the brain.”

Research builds understanding.

Understanding builds conviction.

And fortunes are rarely built on borrowed conviction.

The renowned investor Howard Marks once said, “When the knife stops falling, when the dust settles and there is absolute clarity on the horizon, there won’t be any bargains left.” This simple yet profound statement holds immense relevance for all market participants, especially during times of heightened volatility and uncertainty. Markets, by their very nature, move in cycles — periods of euphoria are followed by phases of pessimism, and the cycle repeats. However, human psychology often works against investors during these swings. Fear and greed dominate decision-making, leading to actions that are counterproductive to long-term wealth creation.

One of the most common and costly mistakes investors make is panicking and selling during downturns, precisely when they should be considering buying. This tendency to flee the markets during corrections, crashes, or even mild pullbacks, stems from a lack of conviction in the businesses they own and an over-reliance on short-term price movements. True investing success lies in understanding that price and value are two very different things. Prices fluctuate wildly. However, the intrinsic value of a good business does not change overnight.

To better illustrate this, consider a simple example. Imagine you are buying a tangible commodity, such as an apple, for ₹100. Over time, its price appreciates to ₹200. Subsequently, the price corrects to ₹80. Despite these price swings, the apple’s intrinsic value — its taste, nutrition, and desirability — remains unchanged. If you had previously determined that the fair value of the apple is ₹150, would you hesitate to buy it at ₹80? Most likely not. In fact, you would see ₹80 as a bargain and a wonderful buying opportunity.

However, this clear logic seems to disappear when it comes to stocks. There are several psychological and structural reasons for this disconnect. First, valuing a stock — an intangible asset is far more complex than valuing a simple commodity. Unlike an apple, a stock’s true worth is influenced by countless variables.

Second, humans are heavily influenced by herd mentality and the prevailing market trend. When prices are rising, optimism is contagious, and everyone wants to participate in the rally, often ignoring the fundamental strengths or weaknesses of the underlying business. Conversely, during corrections or bear markets, panic spreads like wildfire, and investors rush for the exits, even if the business fundamentals remain sound. Many investors end up selling quality businesses at depressed prices, locking in losses that could have been avoided with patience.

This irrational behavior has been particularly evident in the Indian equity markets recently. As indices corrected and volatility increased, a large section of retail investors pulled money out, fearing further losses. These very investors were the ones buying at much higher levels when the markets were euphoric. This behavioral pattern — buying high in excitement and selling low in fear — is the exact opposite of what successful investing requires.

Even the best businesses and the strongest stocks undergo rough patches. It is an inevitable part of their journey. However, very few investors possess the temperament to sit through the painful phases. Long-term wealth creation requires conviction and patience — the ability to hold quality companies through temporary storms and resist the temptation to react impulsively. It is during these corrections, when the market is gripped by fear, that some of the best long-term buying opportunities emerge. However, these opportunities are often missed because fear clouds rational judgment.

The reality is that it’s nearly impossible to perfectly time market tops and bottoms. In hindsight, identifying these points seems obvious, but in real-time, they are not easy. What investors can do, however, is develop a keen understanding of market psychology — recognizing when fear has driven prices far below intrinsic value or when euphoria has pushed valuations to unsustainable levels. This understanding, combined with a firm grasp of a company’s fundamentals, can help investors act counter-cyclically: buying when the majority is fearful and selling when the majority is euphoric.

There is a reason why the majority of participants in the market do not generate substantial long-term returns. The market acts as a wealth transfer mechanism — moving money from the impatient to the patient. Those who have the discipline to hold onto fundamentally strong businesses, even when the market sentiment is negative, are often rewarded handsomely over time. The key lies in seeing every correction, not as a signal to panic, but as an opportunity to accumulate quality businesses at reasonable valuations.

Once investors internalize this perspective, their entire relationship with the market changes. They begin to focus less on short-term price movements and more on the underlying business performance. They stop fearing corrections and start welcoming them as opportunities to buy great companies at discounted prices. This mindset shift — from trading price movements to owning businesses — is what separates successful long-term investors from the rest.

In conclusion, patience, conviction, and a focus on business fundamentals are the cornerstones of wealth creation in the stock market. Markets will always be volatile, and cycles of fear and greed will continue to repeat. But for those who learn to harness these cycles — by buying fear and selling greed — the rewards can be extraordinary.