MY ARTICLE WHICH GOT PUBLISHED IN INDIAN EXPRESS

IF THE INVESTORS ONLY KNEW, IF THE STOCKS ONLY COULD!




“I can calculate the motions of heavenly bodies... But not the madness of people!” Sir Isaac Newton (1642 - 1727)

Studies have shown that human have shown patterns of irrationality, inconsistency and incompetence when arriving at decisions and choices when they are faced with uncertainty. Human nature is one of those things that everybody talks about but no one can define precisely.

The story is told of two salesmen who met at the airport. Their conversation went something like this: “How's business?” asked the first. “Oh, very good,” said the second, “and yours?” “Fine, fine,” said the first. “I got orders for a thousand gross last week. I sell buttons.” “Really,” said the second. “I’ve had one order in the last three years.” “And you call that good?” said the first. “Actually yes,” said the second, “I sell suspension bridges.”
Like the salesmen, the investor must have a clear notion of his goals and expectations and they must realize what is normal and acceptable to someone else might not be what is normal or acceptable to them. The goals of the small investor is not of enlarging their fortune because clearly they currently don’t have one but to make available some money, however small, for the purpose of growing it over time.

Regardless of your income level, investment is possible if three conditions are met:
If you are relatively assured of a steady income. Of course, these days nothing is set in stone.
If you are meeting your current household expenses and obligations.
If you have cash reserves with which to meet unforeseen emergencies.
Of course, these conditions are simply safeguards due to the inescapable fact that stock prices fluctuate and that your judgment of when to buy, when to sell and how long to hold should never be dictated by outside circumstances. Investment should be undertaken only with funds you can honestly and legitimately earmark as discretionary.
A reserve also enables you to pick and choose. Whether you have a few hundred or a few thousand lying around should not automatically mean that it's time to invest it. What's the hurry? As the professionals say, "The market is always there." If the trend isn't to your liking or prices are over-valued a reserve allows you the luxury of waiting for more favorable conditions.

Finally, a reserve permits investment over a period of time rather than all at once. Some “experts” feel you should back what seems to be a good situation with all the investment funds at your command. Others will warn against greed and advise partial investment to spread the risk.

The most apt way is to give yourself the flexibility of moving whatever way “your” judgment dictates. Successful investing is hard, but it doesn't require genius. In fact, Warren Buffett once quipped, “Success in investing doesn't correlate with I.Q. once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” As much as anything else, successful investing requires something perhaps even rarer: the ability to identify and overcome one's own psychological weaknesses.

This field is better known as behavioral finance. This field explains how emotions influence investors and the markets. This explains why prices can go much lower or higher than the actual value when the companies faced with temporary setbacks or business opportunities. This also explains why there are market bubbles and crashes. This is when value investing comes into picture.

When a stock falls, most investors would not cut lose and withdraw his/her stocks. Instead, to avoid the pain and regret of making a bad investment, they might hold on to the stock until the stocks fall even lower until it worths nothing. An investor tends to follow the market crowd. When he sees that a lot of investors are dumping their stock in the market, they will start to fear and ignore their own judgment and start following the crowd. This could cause the stock to fall rock bottom. However, it is the value investors who profit from this who knows whether this is a permanent or temporary setback to the company stocks and whether prices will increase again.

Some of the ways suggested by eminent financial planners to mitigate risks are as follows viz.:
Don’t chase returns.
Diversify: A healthy mix of different assets, mutual funds, fixed deposits and stocks is the only way you can ensure maximum safety of your assets.
Think long term.
Don’t over leverage: It may help you multiply your returns, but at the same time over leveraging can get disastrous if the market tanks. It can multiply your losses.

In order to reap maximum returns from ones investment one must quintessentially overcome ones psychological weaknesses and must invest wisely taking into consideration the valuable suggestions of immensely qualified financial planners.


By
ABHISHEK RANJAN
IMED, PUNE.