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Why Investors Mess Up Equity Investments?

  • 1 year ago
  • 2 min read
  • 572

It is an open secret that equity is the only asset class with the potential to compound your money faster so that you can build a sizable corpus for goals such as children’s higher education and retirement, among others. While many investors start equity investments with gusto, they fail to leverage the full potential of this asset class because of their actions arising out of ignorance or inexperience, that mess up the entire game. And the irony is that these are repeated time and again.

So, where do investors go wrong with their equity investments? Let’s find out.

Investing without knowledge or professional help

Equity investing is a skill which, at the basic level, requires an understanding of the company’s business, competition, and financials. At a deeper level, it is crucial to estimate the fair value by analyzing its key metrics. The task is humongous and challenging in equal proportions, as doing so is not everyone’s cup of tea. Help is at hand with most brokerages authoring research reports for their clients, yet decoding such reports, full of technical jargon, is a herculean task for most investors.

Seeking professional help by engaging a competent financial advisor can make matters easy. The most accessible and affordable option is to invest in diversified equity funds.

Following the Herd Mentality

Legendary investor Warren Buffet has said: “Be fearful when others are greedy and be greedy when others are fearful!”. Data shows that investors do the opposite, and the reason for this is herd mentality. There are reasons for doing so. Equity is risky and uncertain. Going with the crowd gives the much-needed comfort and a feeling of safety. However, this strategy is sure to backfire because if something worked for your peers and acquaintances is no guarantee that it will also work for you.

When the pandemic set in and lockdowns were imposed, many investors took to stock investing as everyone did. An astounding 14.2 million demat accounts were opened in FY21. This data bears testimony to the tendency of herd mentality.

Reacting to Market ‘Noise’

With the advent of social media, everyone out there seems to have donned the hat of an expert doling out free advice to lure innocent investors. All kinds of information exist, from stock analyses to market

predictions to economic forecasts. Investors get carried away by the ‘noise’ around them and are tempted to react to every piece of information. Failing to block such noises, they find themselves in a tight spot. This also comes in the way of developing patience and discipline, a must for equity investing. Legendary investors have often promoted the buy-and-hold approach to equity investing which effectively takes care of all distractions.

Failing to Diversify the Portfolio

Investors who have tasted success by investing in a particular stock or a sector create a comfort zone and fail to look beyond. This leads to a skewed portfolio that can quickly erode if there is any adverse development. It is prudent to spread the investments across stocks, sectors and among large, mid, and small caps. While mid and small caps can fuel returns, large caps provide stability.

Every mistake in equity investing can prove costly; hence, it is imperative to keep them to the minimum. Investors must, therefore, learn not only from their own mistakes but also others. Investors who fail to do so must remember that equity markets are a good teacher, only that they may have to pay heavy fees to learn a lesson or two.

Source: Zee Business

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3 Ways To Become Successful Investors And Avoid Herd Mentality

  • 2 years ago
  • 2 min read
  • 705

If you think successful stock investing requires in-depth knowledge of finance, understanding annual reports and analysing financial statements, think again! What about the role of greed and fear, the two dominating emotions that rule the stock markets and stand like a rock between the investor and success, which remains elusive as ever?

Warren Buffett, a legendary investor of our times, has given a simple formula to beat markets – “Be greedy when others are fearful and be fearful when others are greedy”. What Buffett means is to buy low and sell high. Sounds like common sense. Yet, most investors tend to do the opposite.

Why is it difficult to follow such simple and sage advice? The answer lies in the psychology of investing. More specifically, it is the cognitive bias that is at play. This bias can change a person’s beliefs, opinions, attitude or behaviour because others around him are doing so.

This phenomenon is known as the ‘bandwagon effect’ or ‘herd mentality’.

Humans, as species, have always found comfort in being in a crowd. Our ancestors, when they lived as tribes, always moved in large groups to protect themselves from attacks by hunters and slayers.

Now equate this with the stock market, which is considered risky because of price fluctuations simultaneously caused by factors at play. Many investors, including experienced ones, find navigating the ups and downs difficult. In extreme situations, logical and rational thinking gives way to emotions of greed and fear, which eventually leads to wrong decisions. Therefore, most investors find solace in following and doing what the larger investor fraternity is doing. They simply hop on the bandwagon, which gives them the comfort of being together. The old wisdom – wrong doesn’t become right if accepted by a majority is quickly forgotten.

But then, how do we refrain from joining the bandwagon and keep our sanity and the value of our investments intact? Here are a few guideposts:

Never ignore your asset allocation

You must always follow your asset allocation like the GPS that guides us to our destination. It is the only tool that allows you to buy low and sell high. Rebalancing your asset allocation regularly takes the emotions out of investment decisions.

Avoid the crowd; walk alone.

Cut down on the market noise in the form of tips from friends or the hot market trends going viral on social media. The final decision about any investment should be yours and yours only. Have the courage to walk alone; you must rely on your judgements to scrutinise any investment’s suitability.

Do your homework

It’s always advisable to reach out to your financial advisor for a round of discussion before taking any investment decision. If the logic of your financial advisor doesn’t appeal to you, keep probing till you are satisfied. Do your research before you take the plunge. This is not difficult in today’s era of information.

Only when investors realise that the journey of stock investing is a solitary one, that every investor has a different destination to reach and therefore follows a different path, will they meet success which may otherwise remain elusive forever.

Source: Economic Times