The investors chief problem and even his worst enemyis likely to be himself. Does this famous line by legendary investment guru Benjamin Graham ring a bell in your investment process? Do you buy shares when people all around you are buying and get off the bus when the crowd is dispersing? Graham was not off the target when he said,Basically,price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies. But we crave for action. Buying a scrip for 100 and selling at 120,if not more,and pocketing the difference makes your day. In these volatile times one would short at 120 and buy back at 100 and pocket the difference. But on the second day,your entire capital and previous profit are lost and now you owe money. So when Jesse Livermore said,A loss never bothers me once I have taken it. It is being wrong and not cutting a loss that damages both the pocket book and the soul, he was not off target. Its your emotional quotient (EQ) that determines your success in any field,and more so in this field. So the most notable enemies are as follows: * Instant gratification: You buy a scrip at R100 and once it reaches 120,sell off immediately. Loss aversion: Stick to the loss-making share as selling a share at a discount hurts the ego). * Heuristics (efficient rules of thumb): If the P/E is low,its a cheap stock and if the P/E is high,its an expensive stock. The thumb rules have to be read together with other rules in totality,and not taken as the gospel truth. * Herd mentality: In a bull market,if your colleague is buying,follow him and not the fundamentals. * Chasing fads: Investing in stocks with novel business ideas,expecting fancy prices. Confirmation bias: Want to believe in information that supports ones view. So if you have come across a new idea,you will try to justify yourself and look at the positives,while ignoring the red flags. * Attribution bias: If the stock you track makes a gain,you take all credit and if otherwise,you find a whole host of reasons for failure. * Endowment effect: It becomes difficult to evaluate a stock once you own it. You demand much more to give it up than you would be willing to acquire it. * Status quo: If the portfolio was created via inheritance,the chances of taking action on the portfolio is remote. Outcome outweighing the process: Getting a return of 20% is more important than how the same was achieved. So attributes like whether the investment was as per risk profile or asset allocation go for a toss. It is noticed that we hold on to our losses and sell our gems at the earliest point. In hindsight,we notice that the gems have gone on to become multi-baggers and losers have only drained the portfolio further. Also,if you have received an inheritance in share or mutual fund, many a time one takes no action because of the emotional connection. Stock market and wealth creation do not allow emotions to creep into decision-making. Let Graham have the last word: Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgement is sound,act on it even though others may hesitate or differ. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.So,always trust in yourself. * Your Money - Brijesh Damodaran: The author is founder and managing partner,Zeus WealthWays LLP
