Apr 21, 2010

Rational Behavior in Investing: Some practical points

Investors many times take unnecessary risk. They tend to buy stocks pricey due to fear of losing opportunity and being left out of the rally. But why should at all investors rely on rally? This is wrong approach. You buy first and then let the markets justify it for you. If you have invested right it will eventually come up. Remember: Value investing always beat everything.
Always wait if you are not finding any value picks. Remain on cash. Remember your investment would only reap returns if you follow your value-investing strategy. And otherwise not. So then why invest when you are not sure, and it is like taking unnecessary risk?
If some stocks are going up today and you don’t own many of them or most of them, so what? They were the very stocks that were not going up in past while others were. So you thing to shift to the rising stocks or some others stocks because your stocks are not in the rising or 52-week high list is not rational thinking. They will be some day. You can not predict it. Also see by how much volume this whole lot of mid-cap and small-cap stock are rising. How much is the market float. Many stocks rise with thin volume and in a way to benefit a very few who are on the inside rather than the general investors community like you and me or our friends. Just ask yourself that looking at the given volume or sudden erratic rises how many could have been able to earn out of it? How many could have taken position before not many day? This kind of rational thinking will help you overcome your fear of losing opportunity and being left-out of the market or that your strategy is not right or thoughts that your picks are wrong and so on.

Gems for Value Investors: Parag Parikh's lessons on "Growth Stocks"

               Here are some of the gems from Parag Parikh’s book Value Investing and Behavioral Finance. The views on so-called “Growth Stocks” are very interesting
  • Seasonal investors chase the fancy opf the markets in the name of growth stocks, and call themselves growth investors.
  • Growth stocks investing is based on hunches, dreams, illusions or popular opinion. They are better termed as ‘dream stocks’.
  • Growth stocks investing is more of a philosophy of buying what is popular.
  • When one can not justify the high valuation of a stock one would argur\e that is is a growth stock and hense expensive.
  • For any stock to be a growth stock it has first to be value stock, value and growth are inseparable.
  • The concept of growth stock is a product of bull market. It dies when the bear market sets in. Bear markets create value.
  • The term ‘growth stock’ is meangless since ‘growth stocks’ can be identified only in retrospection; it is merely stock that went up.
  • When a stock becomes a fancy and fad in the market, it is chased by one and all. The sharp rise in the stock price makes it growth stock. Before the rise how many would call it a growth stock? It is only when the price move very fast it is evident that it has found fancy and is thus termed as a growth stock.
  • It is the value of mastery that excites investors. It is the lure of the newand the unknown that fascinates the investors. Investors are always looking at something new, as they believe that novelty can fetch them more money. This novelty becomes a fancy when more and more investors chase it. This mixes with behavioural biases. Thus, a fad and fancy start quoting at fancy prices. This is termed as growth stock as there is no available explanation to justify the steep rise in price.
  • Growth investing is investing in new ideas, new technology, new sectors, new initial public offerings, new additions to the indices, new fada and fancies etc.
  • Value investing is knowledge and growth investing is mystery.
There are a lot more gems from India's own value investing veteran. We will update more later on. 
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