Abhijeet had started investing in direct equity more than a decade ago. Starting with NFO’s and then inputs from the ‘tips’, and peer investing models. The fall in the equity market in 2008, set him thinking. He wanted to re-visit the events till date, for the investment decision made by him in the past decade. Was it only the fundamentals or technicals of the scrip which made him buy/sell/hold or were there other factors based on which the decision was made.
He realised that one of the best stocks in his portfolio was a banking stock, one, which he had bought nearly 8 years ago and had let it remain in the portfolio, because he was working in the banking sector and had great belief in the banking story. But, he had never increased the holdings.
Another stock, which he had bought on peer advise had lost more than 80 per cent of the value, but he had continued to increase the holdings. The mantra was — average the cost and reduce the loss. The loss was reduced , but the cost of holding has gone up.
He had identified a potential multi-bgger in the consumer goods space and was itching to buy the scrip. He had given a limit order to buy and on the particular day, he had missed the buy by a difference of `1. The next day too he placed the limit order and this time the scrip inched more upwards and then, he stopped tracking the scrip. This particular scrip in a matter of 5 years had given more than 5 times the return.
All the above has a common thread — EQ (Emotional Quotient) or lets say mental strength and emotions. And this is giving rise to a new school of thought — Behavioural Finance.
Traditional theory states that markets are efficient and rational decisions are made by the investors. However, the emerging school of behaviourial economists share that the markets are not efficient and investors are prone to behavioural anomalies, leading to irrational decisions .
How true the words of Warren Buffett ring in when he said, “ It is only when you combine sound intellect with emotional discipline that you get rational behaviour.”
Today, we give more credence to outcome than to the process. And this may run for a few occasions, but end of the day, process does ensure that one does not lose out. And this is where “Tips” come into play. If you want to buy a house or a car, you compare, visit and check and then make the purchase. However, in stocks, your peer or your broker tells you about the scrip with a caveat that this opportunity is only for a limited time and you will rush to buy.
Why don’t you use the same principle which was used while buying a house.
On hearsay and more importantly for greed (a few pennies more), you throw caution to the wind and play poker ( this is gambling and not investing)
Keynes had rightly said, “Wordly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally”. So looking right is more important than being right.
Following the basic principles of investing: Asset allocation and Portfolio rebalancing will go a long way in keeping the emotions in check while effecting investments.
(Brijesh Damodaran
Founder and Managing Partner – Zeus WealthWays LLP and can be contacted at brijesh@wealthways.in [1])
Links:
[1] mailto:brijesh@wealthways.in