How many times have you attempted investing in the stock market or mutual funds and doubted yourself? There are several driving forces which influence your decision-making abilities as far as investments are concerned. Most of them are decision-altering and more or less make an impact on your portfolio.
A segment of finance is behavioral finance which studies the behavior of investors, driving forces, how investors react to ups and downs and several other things. One question that keeps popping up in every investor’s mind every now and then in some form or other is- “Am I an investing genius?” or “Am I qualified enough to understand investing?”
In the words of Parag Parikh, founder of PPFAS AMC, “there is nothing like a stock market genius, only those who exercise great control on their emotions are smart investors.” To understand this, a simple example of an investor who gets worried on a dip in the market and stats selling aggressively at any price offered is the best. Similarly, an emotionally unstable investor would buy stocks of a company which is at its performance best only to face a dip sooner.
What is ironical is that investors follow a herd behavior where thy assume a stock to be less risky when it is at it’s high and everybody is buying it and on the other hand assume a stock to be riskier when it is at it’s low and nobody is buying it. Had investing been so predictable, everyone would have been a billionaire by now. The question now arises, how to deal with it?
The biggest enemy of all investors and their portfolio is impulsive handling of the portfolio. Here are few tips to counter those impulses;
Think before you buy
First and foremost, before you buy those stocks, think! Value investing is a concept which enables an investor to buy stocks which are cheaper than their intrinsic value. If you buying shares higher their true value you are entering the fool theory wherein you will expect another fool to buy those stocks from you at a higher price and make profits.
There are two concepts which need to be understood here- value in use and value in exchange. Both values in use and exchange are different. For example, air or oxygen is an excellent commodity having high value in use but no one is going to pay you anything for it. On the other hand, gold is not much worthy for value in use but holds great power when exchanged.
Before you buy those stocks, make sure that you-
Have checked the credibility of the management
Have an understanding of the business
Have an eye for well-defined moat and pricing power
Think twice before you sell
Buying stock is an important thing and requires your attention but selling your stocks is a greater event. A value investor’s basic principle of investing should be aligned with ‘Law of Farm’ which is a universal law. According to the law of farm, no one can sow a seed today and reap the fruits tomorrow. A seed needs proper light, water, air, temperature to develop into a fruit-bearing tree. It needs to go through different seasons to be properly ripe and ready to be harvested. Similarly, in value investing, you must wait. Waiting is an integral part of creating your stocks value and growing it bigger. On the other hand, man-made laws are short-lived and short-term. Man needs instant results and hence has created short cuts for all processes.
Investing does not work on man-made laws. The market walks its own walk and maintains its unpredictability. Doing research about stocks and investing in them is one part of the game but you need to hold it for a considerable period in order to reap benefits. There are no shortcuts in investing.
Before you plan on selling your stocks, ask these questions:
Is there an urgent requirement of money?
Does the research about company and business still hold good?
Is this an overreaction to market movement?
Is this selling compatible with my goals?
Either way, you must be convinced if the sale or purchase of stocks is in accordance with your goals and research. Remember, there are no permanent phases in the market- neither bull nor bear.