By Manish Goel
In times of market downhill, have you ever hit the sell button in the panic?
Have you ever regretted any of your investment decision?
Have you ever purchased any stocks to follow the market herd?
If your answer to any of these questions is yes, then it is time to wake up! You are a victim of ‘emotional investing’.
Very often, many investors connote success in the stock market with the high proprietary model, complicated technical charts, continuous monitoring of the stocks and avaricious reading about all the stock market updates. However, that is not the only formula to stay ahead in the investing game. During the 2017 Berkshire Hathaway Annual Meeting, Charlie Munger (Warren Buffett’s partner) highlighted the importance of logical thinking with a simple yet thought-provoking statement. He said, “A lot of other people are trying to be brilliant and we are just trying to stay rational. And it’s a big advantage.”
Investing in the stock market is both an art and a science. It is an art not to let emotions sway our investment decisions, which only a few investors are proficient at. It is a science as you need to follow a systematic process while spotting the stocks that are trading with a wide margin-of-safety and at the same time exhibiting strong fundamentals and growth potential. Your prowess as a successful investor will depend a lot on your research skills to identify strong stocks and rational decision-making skills. While it is comparatively easy to learn the nitty-gritty of the former, it is difficult to achieve emotional maturity. Emotions are universal and there’s no way you can halt them. But what happens if your investment decisions are based on your anxiety in times of market stress or driven by euphoria in times of market uphill? All you would be doing is hitting the ‘buy’ or ‘sell’ button. Taking decisions that are free from anxiety, panic, haste and greed is a tough row to hoe, but this is where the wealth creation secret lies. Understanding the science of investing is easier than learning the art of separating your emotions while taking investment decisions.
Consider two investors: Investor A, who either invests on his own or follows the stock advice of his financial advisor. However, this investor is anxious about the market’s daily movements and is obsessed with the stock’s daily opening and closing price. He follows all the news and market updates and frequently churns his portfolio based on the daily fluctuations.
Meet Investor B, who also invests in the equities. However, this investor doesn’t spend much time on tracking daily stock price, media news or market updates. Rather, he carefully picks his stocks and takes calculated risks.
Which investor you think would be able to create more wealth in the stock market? The answer is obviously Investor B. Behavioural biases can derail your long-term plan, which can sabotage your wealth creation journey.
Behavioural biases are ubiquitous and it’s difficult to control your temperament. With few exercises, one can learn to mitigate risks associated with emotional investing.
Here are four simple yet effective ways to avoid the costs of emotional investing:
Accept the volatility
Markets were always uncertain, and they are going to remain so. The worst part is you can’t do anything about it, except for embracing it with open arms.
Don’t predict, prepare a plan
Once you come to terms with the uncertainty in the stock market, it is easy to minimise its impact. Allow some time for introspection before you chart out your plan. What is the purpose of your investments? Why are you investing in a particular stock? Ask such questions before you prepare your plan. This plan will help you to stay focussed even in times of a bear run. A successful investor doesn’t predict the market but prepares himself for the future.
Don’t just trade, invest in solid businesses
Invest in stocks which display strong fundamentals. Instead of following the markets fashionable trends or continuous flow of market noise, focus on knowing the stocks and the management behind it. If you know what you are owning and why you are owning it, it will help you to stay level-headed when the markets go berserk.
Don’t time the market, allow time in the market
Instead of trying futile attempts of timing the market by analysing daily fluctuations or checking every market update, try focussing on improving your investing methodology.
Capitalise on a sale in the stock market
We all love shopping during a sale, but when there is a sale in the stock market, we are in fright and horror. The best investors are the ones who are not perturbed by daily randomness, but the ones who stick to their process and use market corrections to add value businesses to their portfolio.
And most importantly, remember these wise words by Benjamin Graham: “The investor’s chief problem—and even his worst enemy—is likely to be himself.”
Manish Goel is founder-director at Research & Ranking, an investment advisory firm.