If you have been a member of the Safal Niveshak tribe for long, you know our hottest topic of discussion here. It is how various aspects of human behaviour influence investing.
As we have discussed at times, we are often our worst enemy when it comes to investing our hard-earned money.
An understanding of how vulnerable we are to our own psychology can help us avoid the stupid investor delusions that can screw up our financial security.
There is an old adage about the game of poker: If you sit down at the table and can’t figure out who the sucker is, get up and leave because it’s you.
These insights about investor psychology can keep you from being the easy prey.
Burton Malkiel, in his investing masterpiece, A Random Walk Down Wall Street, cites the study done by Charles Ellis, a longtime observer of stock markets and author of another brilliant investing book Winning The Loser’s Game.
As per Ellis, in the game of amateur tennis, most points are won not by the skilful shots on your part but rather by mistakes on the part of your opponent.
This also holds true in investing. Ellis argues that most investors beat themselves by engaging in mistaken stock-market strategies rather than accepting the passive buy-and-hold approach that has proven to be the best way to make money from stocks in the long term.
The way most investors behave, the stock markets become a loser’s game.
You don’t need to go far in history to see how investors have lost the plot that has been of their own doing.
In 2000, when the tech stock you bought moved persistently higher, wasn’t it easy to convince yourself that you were an investment genius?
In 2007, if you were like the many who gave up their jobs and businesses to engage full-time in day trading, wasn’t it thrilling to buy a stock at 10 am and find it has risen 10% by noon?
All such situations ended in disaster.
You see, the first step in dealing with the destructive effects of our behavioural shortcomings is to recognize them.
It’s important to bow to the wisdom of the markets.
Just as the tennis amateur who simply tries to return the ball with no fancy moves is the one who usually wins, so does the investor who simply buys and holds a diversified portfolio comprising of carefully-chosen good-quality stocks.
Don’t be your own worst enemy. Avoid stupid investor tricks.
- Avoid herd behaviour…stay out of the rat race
- Avoid over-trading
- Avoid hot stocks and flashy IPOs (and 99% of IPOs are flashy)
- Avoid holding on to your losing stocks.
- Avoid following business channel advice
Avoid all this, but don’t avoid the work that you need to do on your own to identify the real ‘you’, and the good stocks that can help you maximise your wealth in the long term.
Remember, financial fear only occurs in those who don’t know what they are doing.
In that situation, you are your own worst enemy…not bankers, not brokers, not business channel experts. You.