stock market greed and fear

7 Ugly Truth About Stock Market That You Should Know

The stock market looks like a golden place to build wealth. There are a number of popular stories of the ace investors in India (and abroad) who made tonnes of money by investing in stocks. However, alongside the pros, there are also many ugly truths about stock market which most successful investors and analysts ignore to discuss.

In this post, we are going to review 7 such ugly truth about stock market which every retail investor should know.

7 Ugly Truth about Stock Market –

1. No stock can give guaranteed returns:

Even the ‘bluest of the blue chips‘ can ‘underperform’ and ‘not’ give any return for the sustained long-term time period. There’s a risk involved in any stock that you invest, no matter how safe it might sound.

There are thousands of reasons that may affect the share price of a company. For example- Economy (local or global), industry, Company’s fundamentals, technicals, new regulations, taxes, social and political risks and many more. If anyone is giving you a guaranteed returns promise, then either he’s not experienced or he’s just lying to you. In the stock market, the best you can do is to minimize the risk by taking calculated ‘informed’ decision.

“Successful investing is not about avoiding risk, but managing it.” -Benjamin Graham

2. Greed and Fear Run the Market:

stock market greed and fear

It’s usual for a stock market investors to get caught up with greed and fear.

When everything is doing well – good economy, high employment, government taking favorable decisions, etc, people become optimistic and somewhat greedy. After all, we all hope to make as much wealth as possible in the shortest amount of time. And this leads to the mis-pricing on stocks. Because of the investor’s excessive desire (greed), it becomes difficult to maintain a long-term strategy and stick to the fundamentals.

On the other hand- when things are bad, the economy is not doing well and the market suffers a loss for the sustained long period, then people become excessive defensive (believing the market/economy will continue to decline forever).

This greed and fear drive the market and influences the ‘decisions’ of the most of the stock investors. Although most GURUS will not agree, the truth is that it’s really tough to control your greed and fear to make a sound investment decision.

3. The corporate leaders may manipulate their earnings.

Hate to say it, but yes, the corporate leaders may manipulate their earnings. This is an ugly truth about stock market.

Everyone wants to invest in a fast-growing company. And what can be a better sign of growth than consistently increasing earnings of a company?

However, when the market starts expecting an extraordinary performance from the company quarter-after-quarter, it puts a lot of pressure on the corporate leaders to meet those expectations. And when they fail to do so, being afraid that their share price may fall down— sometimes they manipulate their results.

There are a number of examples of companies who are found guilty of manipulating their financial statements. The best example (which you might already know) is –Satyam Computers.

4. Would you pay Rs 1,000 for a one-liter packet of milk?

Sounds stupid, right? But this is a common scenario in the stock market.

Most of the people over-pay to buy a hot stock and later end up losing money when the heat is gone. There are many companies who are trading at a valuation way higher than their Price to earnings (PE) ratio even when they are not growing at a decent pace. Overpaying for purchasing premium stocks is a real ugly truth about stock market.

Anyways, why do people overpay to purchase stocks?

The only time when you’ll be ready to pay Rs 1,000 for a one-liter packet of milk is when you don’t know its real price, right? Same happens with the stock market investors. They buy stocks without doing a proper study and hence, end up overpaying for it.

“Stock market is filled with individuals who know the price of everything, but the value of nothing” -Philip Fisher

5. Over 90% of people lose money in the stock market:

This is the ugliest truth about the stock market. Not everyone makes money from the stock market. In fact, over 90% population loses money in stocks.

This is not because the market doesn’t give equal opportunity to all. This is because most people are not ready to put any time or efforts. Given an option- A) Research a company and invest intelligently or B) Invest in a rumored multi-bagger stock recommended by a friend, most of the people will choose the second option.

New to stocks? Confused where to begin?  Here’s an amazing online course for beginners: ‘HOW TO PICK WINNING STOCKS?‘ Enroll now and start your investing journey today…

6. The ‘Herd mentality’ ruins everything

herd mentality

An investor’s natural instinct goes with the ones of masses, which means that he/she doesn’t seem to have a rational view on a certain investment but is more likely to deviate where the majority mass is moving – this little phenomenon is known as the “Herd Mentality”.

Nevertheless, this never turns out to be profitable for the stock investors. Many of the worst financial crisis in the stock market like dot-com bubble or the economic recession of 2008 can be attributable to the same human tendency- HERD MENTALITY.

7. No one knows the future

Yes, I repeat, No one knows the future. An ugly but honest truth about stock market.

The top-notch analysts who keep guessing the economic expansion or recession- will ‘fail’ to predict the same when a similar situation like 2008 (where the market falls over 60%) will repeat.

Advisers provide financial advice based on the available information and their experience. If you expect them to predict the future as well- you are deluded, and if they do predict the future, they are. When you are entering the stock market be ready to see many unexpected things. No one knows the future.

Remember what Warren Buffett always used to say —

“In the business world, the rear view mirror is always clearer than the windshield.” -Warren Buffett

June 27, 2018 Investment Basics 4 comments
Do beginners really need a mentor to successfully learn to invest

Do beginners really need a mentor to learn to invest successfully?

Do beginners really need a mentor to learn to invest successfully?

We all know the story of Warren Buffett!! How he attended Columbia University and got mentored by his professor and a great investor- Benjamin Graham (The father of value investing and author of the best selling book ‘The Intelligent Investor’).

There’s no questioning the fact that Warren Buffett became one of the most significant investors of all time. Moreover, he always gives credit to his mentor, Benjamin Graham (and Philip Fisher – a well-known growth investor) for helping him become what he is today.

Even in the Indian stock market, Rakesh Jhunjhunwala considers RK Damani (Owner of D-Mart Supermarket chains) as his guru.

Anyways, the big question for today is.. do beginners really need a mentor to learn to invest successfully? Can you learn and start to invest in the Indian stock market without an actual mentor?

The Pros of having a mentor:

Having a mentor will save you a lot of time!!

You can learn different successful investing tips and strategies from his experience. You don’t have to re-invent the wheel. All the fundamentals get transferred from the mentor to the student. They will also help you not to waste time on studying insignificant things – which has no importance — (but if you didn’t know that, then it would have cost you a lot of time).

Moreover, they’ll also guide you to avoid mistakes that they made– so that you can save a lot of time (and money).

In short, having a mentor is the best thing that you can get in the investing world.

How to find a mentor?

If you know any relative, friend, professor, or anyone who is successfully investing in the stock market, then you can approach them for help and mentorship. Most of the time, if you request politely, they will be ready to take you under their stewardship.

However, finding a mentor in the investing world is not so easy, is it?

A tiny population of India invests in the stock market. And if you do not have a family background in the stock market world, then the chances are that you’ll never find anyone close to you who’s a successful stock market investor.

Even in my case- I couldn’t find an actual mentor. It’s not because I didn’t try. It’s because there’s no one is my proximity who really invests actively in the stock market and has a good knowledge of it.

Also read: #9 Things I Wish I had Avoided During my Initial Days in Stock Market.

Why it’s okay if you can’t find a mentor- in actual?

Although having a mentor will simplify your stock market journey. However, even if you are not able to find one, it’s not the end of your journey. Here I’ll give you simple strategy how you can successfully learn to invest without having an actual mentor…

Find a virtual one …!!

Today is the world of internet. All the information that you need to learn is ‘instantly and cheaply’ available. If you can’t find an actual mentor- then find a virtual one.

Your mentor does not need to sit next to you all the time, right? All you want is to learn from his experience, not to relax in his chamber. And you can do this without even meeting him once.

My solution, start reading books written by the successful investors.

In any book, the author/investor generally covers everything that they have learned so far in their journey. And if you can learn this just by reading 500-600 pages, aren’t they worth reading?

Imagine if you have read 8-10 books, then you would have learned the investing journey of 8-10 investors– their strategies, their achievements, their failures and a lot more.

Moreover, here you are not learning from just one mentor. You are learning the journey of multiple mentors. And further, here you have the power to choose the best strategy which suits you.

Also read: 10 Must Read Books For Stock Market Investors.

Another solution to not having an actual mentor is to … start reading investing blogs.

Most of the investing bloggers will cover everything that they learned– in their blogs. And it’s freely available on the internet. All you need to do is to spend some time and efforts. You can consider these bloggers as your virtual mentor and learn from them.

Moreover, the best point here is that they are easily approachable.

The contact details of most of the bloggers are present on their website/blog. In short, they are just an email away. Send an email with your doubts. If you are feeling shy to send a cold email, then comment on their posts with your queries (Please do not spam :p). Almost all the comments get a reply from the author.

Overall, finding a virtual mentor and learning from their experience is an excellent alternative to finding a real one– to learn to invest in stocks.

Also read: 7 Best Indian Stock Market Blogs to Follow.

Conclusion

Although finding an actual mentor might be little tricky for a newbie investor, however, getting a virtual mentor is not so burdensome. Find a virtual mentor. It’s the learning that matters the most– not how you acquired it.

Start reading books and follow investing blogs. By doing so, you can learn everything that you need to know, without even moving an inch from your study room.

June 24, 2018 Investment Basics 3 comments
Should You Use Credit Card

Should You Use Credit Card? Mystery Explained.

Should You Use Credit Card? – Pros and Cons of Using Credit Cards:

The credit card also bears the name of “debtless debt” which makes your catching up with your needs and requirements quite easily. In fact, this is the bottom-line for those who recklessly use credit cards for purchasing things.

The debate that revolves around the propaganda of using a credit card is endless with different opinions associated with different sets of people. Let’s break this rationally by seeing the possible alternatives of using a credit card:

  1. Paying cash – going the old school way,
  2. Using your debit card with instant balance deduction from the bank – a kind of digital money method.

In countries like India (the developing ones), we still have a way to go before we can use credit card everywhere. I am not talking about the online stores or any other huge retailer’s stores but at places like a parking lot or small stores, one can’t possibly choose to pay via a credit card. Therefore, using hard cash is the only way around. But we won’t only stop here stating this argument; let’s objectively view different pointers, pros, and cons of using a credit card as a payment method.

What is a credit card?

A credit card can be acted as a payment option which allows you to buy or purchase things or service on credit until a specific period of time. To put it in simpler words:

If (or not) one doesn’t have cash available at a specific point of time, one can make use of credit card to use the credits to pay at a later date. 

The keyword(s) to pull out of here is to “pay at a later date”. For revolving accounts, a minimum balance statement is due on every month end. On the other hand, for a charge card, the full balance to pay is due on every month end.

Various stores and merchants are now dismissing the use of cash as a mode of payment already. In fact, they only accept their fee through credit cards due to obvious security-related concerns. However, unlike the US, there is still a lot of scope remaining with hard cash in India. In fact, one can totally live without a credit card in India.

Credit Card – A kind of free cash? Or Not?

If you want to steer clear out of troubles, you must never consider credit card as a form of free cash. Remember, whenever you ask a bank for a loan, your credit history is checked thoroughly and it better not be bad to get your loan cleared. The amount you are using your credit card for has to be paid back in time to the bank or else you will be charged with heave penalties.

Thus, contrary to popular beliefs and no matter whatever people say, a credit card is not free money. If you don’t have the money right now, you should never charge your credit card then. Otherwise, it would be very tough for you to repay the amount in time.

Now that you have understood the basics of the credit card, the next big questions- Should you use credit card? Before jumping to any conclusion, first, let’s discuss the pros and cons of using a credit card.

Also read: #11 Best Passive Ways to Make Money While You Sleep.

Should You Use Credit Card?

Credit Card Pros – The Green Signal

1. Security and Convenience – There’s always a dilemma of “how much to withdraw from ATM?” No matter what, either the money you withdraw is going to be huge that there will always be a fear of theft or else it would be very inconvenient to withdraw money from ATM time and again because you ran out of money. Enter, Credit Card – a convenient mode of payment. You could always leave your money in the safer hands of the bank and can use your card for your purchases.

2. With Credit Card comes Big Rewards – As much as you use your credit card, the points on your card keeps increasing. Additionally, you can get other cash backs on several purchases, gas rewards. Many credit cards offer you free insurance on your air ticket, bus ticket, and hotel payments. Whatever that you save on your hefty payments can be considered as “incoming money” right?

Also read: 10 Best Credit Cards in India [With Exploding Benefits]

Credit Card Cons – The Red Flag

1. The Free Money Dilemma – With a privilege of having to pay back later, we always end up spending way more than we should. That is where the banks are earning. Always remember, the exciting cash backs, reward points and other benefits that come with credit cards are always issued while keeping the profitability factor in mind.

2. Hurts your Credit Score if Abused – If your credit score is abused, you won’t be able to earn many credits or rather, it would be difficult. This brings your heavy responsibilities of balancing the use of credit card to a normal extent. Moreover, there are times when the credit card issuers don’t clearly state the terms and conditions and trap the users. Be the smarter one and ask for it in the beginning to specify all the terms and conditions.

Note: If you are yet to get a credit card, here is a quick link to check your eligibility and apply for the best credit card online.

Conclusion:

Obviously, there’s no free meal in this world. If you are using a credit card today, you have to pay back later. However, the use of credit cards provides a lot of convenience to its users. Further, it can be handy in case of a tight budget where it’s better to use credit than to ask for debt/loan.

June 21, 2018 Credit Cards, Personal Finance No comments yet
Why building a great stock portfolio is a marathon not a sprint

Why building a great stock portfolio is a marathon not a sprint?

Building a great stock portfolio is the key to build wealth over time. However, the trouble is that the process of creating excellent stock portfolio ‘not-so-fast’ as most people imagine it to be.

Most of the people who enter the stock market are eager to invest everything right away. They want to build a fantastic stock portfolio at once and then relax for years. However, that’s not how building a good portfolio works.

One Simple rule to build astonishing stock portfolio:

If you’re trying to make a great stock portfolio within a month, then you are going to fail. Do not try to build an extraordinary stock portfolio in a month or two.

It takes years to find the best stocks and building an amazing stock portfolio. Moreover, you are not supposed to find all the great stocks at once- one at a time.

The actual strategy to build a great stock portfolio is simple. Invest in good stocks, continuously monitor and then do either of the following…

  • Continue holding the fundamentally strong shares
  • Get rid of the losers.

With time, you will notice that all the right stocks will add up and most of the poor shares will be gone.

Why do most people fail to build a strong stock portfolio?

A majority of investing population fail to build a strong portfolio is they like short-term profits/gains.

If you keep selling your best stocks, then how are you going to build a great portfolio over time. You have to keep your winners and cut your losers. That’s the key to make an amazing collection.

However, most people do the contrary. They sell their winners in short-term to get instant gratification. And they keep adding their losers (just to break-even).

New to stocks? Confused where to begin?  Here’s an amazing online course for beginners: ‘HOW TO PICK WINNING STOCKS?‘ This course is currently available at a discount. 

The market gives opportunities – Repetitively!!

When you are investing in building long-term wealth, you need to understand that market will you opportunity, again and again. Maybe not instantly, but definitely.

Suppose you missed a fantastic company when it was trading at a decent valuation. Now, the basic instinct of most of the inexperienced investors is to make a position in that stock ‘anyhow’ (Winner’s Curse). However, buying an over-valued stock and thinking that you’re building an amazing portfolio is stupid. Here, you need to have patience.

Remember that market will give you opportunities. Maybe not instantly, but definitely in the long run. You just have to keep patience and wait for the perfect time to enter in that stock. Sometimes, this opportunity might take years to appear again.

Let me give you an example from my experience. I was considering to buy VIP industries in June-July 2017. At that time, it was trading at a stock price of Rs 180-190 (decent valuation compared to the price at that time). However, during that period, I was overly occupied with some important work at my day job and missed the opportunity. The cost of VIP Industries continued to climb up in the next few months.

Nevertheless, I got the next opportunity to enter that stock in March 2018 (after nine months of waiting)- when most of the shares were again trading at a low price because of the re-introduction of the long-term capital gain tax. I purchased the stock of VIP Ind at Rs 312 in March 2018. I was planning to invest more if the price goes down further, but it didn’t. Currently (June 2018), the stock is trading at a price of Rs 438.

vip share price

(Disclaimer- I used this stock reference just for example. It’s not a recommendation or advisory. The stock might be trading at a high valuation currently).

Conclusion:

Building a great stock portfolio takes time. It’s not easy to create a great portfolio in a month. 

But remember- the market is going to give you opportunity again and again. Building a great portfolio is not a sprint. It’s a marathon!! Have patience.

Happy Investing.

June 21, 2018 Investment Basics No comments yet
herd mentality

The First Golden Rule of Investing -Avoid Herd Mentality.

Herd mentality is a very common investing psychology seen in most investments done by the people. Here, a majority of past investment done by the mass constitutes a refined data to show inferences.

An investor’s natural instinct goes with the ones of masses, which means that he/she doesn’t seem to have a rational view on a certain investment but is more likely to deviate where the majority mass is moving – this little phenomenon is known as the “Herd Mentality”.

The term has been derived from the natural instinct of a number of sheep walking together in a herd so as to avoid falling into the pitfalls of danger.

herd of sheeps

If you look around, our daily actions are based on this little psychological term that we have just read about. If we break down the context of “Herd Mentality” to its core, we would find out that the concept is more related to “how do the natural instincts work for humans”.

Interestingly, you can also find a large population of investing community following herd mentality psychology in making various financial decisions like buying new property or investing in the stock market. Seeing others getting profited with an investment, our brain tells us to go for it without a second thought.

Why does herd behavior happen?

Although investing collectively is harmful and irrational, however, most of the people choose this tendency because of two basic (human) reasons:

  1. Strong social pressure: Most of the people like to be accepted by a group, rather than branded as an outsider or outcast. Following what the others are doing is a natural way of becoming a member of that group. That’s why following the herd is the logical tendency to avoid social pressure.
  2. Irrational belief that a large number of people cannot be wrong: In general, people believes that the larger the group of people involved in any decision, the lessor is the chance of the decision being incorrect. Again, this is a natural instinct of humans. Until and unless anyone has little experience and expertise of the domain, he/she avoid directly opposing the masses.

Herd Mentality in Stock Market:

Many of the worst financial crisis in the stock market like dot-com bubble or the economic recession of 2008 can be attributable to the same human tendency- HERD MENTALITY. Here are few examples of herd mentality in the stock market from day to day market scenario:

  • Buying a stock which everyone else is buying :

The buying decision of an average investor can be easily influenced by the actions of his friends, neighbors, or acquaintances. Suppose all your friend bought one specific stock whose price is rising day by day. Further, all your friends are making fun of you that you didn’t buy that stock when then initially recommended. What would be the natural instinct of an average investor here?

If everyone around you is investing in a particular stock, then the tendency for potential investors is to do the same. However, this strategy never turns out to be fruitful for an investor in the long run.

herd mentality stocks

  • Investing in ‘Hot’ Stocks

Hot stocks are the darlings of the new investors as these stocks are the ones which are constantly in news and everyone is talking about its upside potential. However, hot stocks become ‘hot’ only when the majority or herd moves their money in this stock after seeing so many other investors doing the same thing.

The ones who are actually going to get benefit from these stocks are the ones who invested in these stocks way before it became a hot stock. The rest (herd) who puts their money in these stocks (when the prices are already high) is going to lose their hard earned money in the stock market.

New to stocks? Confused where to begin?  Here’s an amazing online course for beginners: ‘HOW TO PICK WINNING STOCKS?‘ This course is currently available at a discount. 

How to Avoid the Herd Mentality and Make Better Investment Decisions?

It is quite clear by now that judging “collective” behavior wouldn’t do any good when it comes to making an important decision about investments. Most naturally, following what majority of people has chosen is always a tempting and “safe” option to go for. However, without foreseeing the background, one can’t be sure of any important decision.

Jumping on a bandwagon without knowing every bits and piece of details about it is something unnecessary in the investment domain. Before making an investment, make sure that you do the following things:

1. Do your research: A little bit of research never hurts. In fact, this should be one’s habit before making any investment. You can use various references to know the details about any kind of investment you want to jump into. In fact, the more you read, the better it would be.

2. Consult a financial advisor: If you cannot give enough time for the research/study, then why not consult an expert. He/she will be able to give you a better advise compared to your amateur friends or neighbors. 

At last, use your wit to take your decision!

Also read: Loss Aversion- How it Can Ruin Your Investments?

June 19, 2018 Investing Psychology 2 comments
9 Simple Yet Powerful Rules of Successful Investing

9 Simple Yet Powerful Rules of Successful Investing.

9 Simple Yet Powerful Rules of Successful investing:

Most people who are new to the stock market believes that there is some hidden formula for successful investing that people from a business background or those having an educational qualification in finance/commerce knows.

However, the truth is that rules of successful investing are quite elementary and straightforward. In this post, we are going to discuss nine simple yet powerful rules of successful investing to create wealth over time.

9 Simple Yet Powerful Rules of Successful investing:

1. Get started early.

This is the very first rule of successful investing. If you want to create wealth over time, there are two critical factors. First, the return on investment (or ROI) that you’ll be getting on your investments. And second, the time frame for which you’ll be investing.

My maximizing the time frame, you can maximize the returns even if your returns are average. Here, the power of compounding is in your favor.

2. Invest consistently.

Most people start investing in the bull market- when the market is high, the economy is good and everyone is happy. However, when the things turn around (bear market), many of them back out. Either they take everything out of the market or stop investing further. Nevertheless, if you ask any seasoned investor, then you’ll learn that bear market is the best time to invest. This is the period when most of the stocks are trading at a discount.

This second rule of successful investing advocates that you need to invest consistently. Maybe, you can wait for some time horizon if the market is high and no stocks are trading at a reasonable valuation. However, it doesn’t mean that you should take a gap of five years and then enter again in the market.

If you want to build wealth from the market, you need to invest consistently. Moreover, you also need to increase your investment amount continuously.

3. Think long-term.

“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” -Warren Buffett

Investing is a proven strategy to build long-term wealth for a secured future through systematic planning and smart decisions. However, most people do not care about this strategy. They simply want to get a return of two-three times in the next six months and make money fast.

If you want to build wealth through stocks, then you need to think long term. Most of the stocks take at least two to three years time frame to give good returns to their shareholders. Moreover, the biggest wealth creators are those stocks which have been in your portfolio for over a decade. In short, thinking long term is the key rule of successful investing and creating wealth.

4. Diversify.

“Do not keep all your eggs in the same basket.” This is the grandpa rule of successful investing. If you invest in just one stock, and it doesn’t perform (due to whatever reason), it can easily destroy your complete wealth. However, if your investment is diversified (5 or more stocks), then the chances of a single stock hurting your entire portfolio is significantly reduced.

“Minimizing downside risk while maximizing the upside is a powerful concept.” – Mohnish Pabrai

5. Never borrow to invest

Although this rule of successfully investing is self-explanatory, however, there is still a portion of investors who ignore this rule. If you are planning to start investing in the stock market, first get rid of your previous debts. Moreover, you should only invest that amount which is surplus. There are various risks associated with the stock market and investing by borrowing money can lead you into a lot of troubles.

6. Invest in what you believe in.

There’s a famous quote by Peter Lynch- one of the most successful fund manager and the author of the best-selling book ‘One up on wall street’- ‘Invest in what you know’.

This rule of successful investing gives the veto power to the investors. If you do not believe in any stock, then just don’t invest. It takes a lot of willpower to hold the stock when the prices are going down and your portfolio is in red. If you do not believe in a certain stock, it will be the first one to be sold when the prices are going down (no matter how strong/weak are its fundamentals).

Therefore, invest in what you believe. First, convince yourself why you want to invest in that stock with reasons and facts. If you truly believe in the future potential of that stock, only then invest.

New to stocks? Confused where to begin?  Here’s an amazing online course for beginners: ‘HOW TO PICK WINNING STOCKS?‘ This course is currently available at a discount. 

7. Ignore the short-term fluctuations

The stock market works on sentiments- GREED & FEAR. In short term, the people sentiments run the market. Therefore, the prices are doomed to fluctuate. There are thousands of factors that run the market- Economy (globally or locally), stock fundamentals, technicals, politics, international relations, government policies etc. And the public reaction on all these factors moves the share price. However, in the long term, the consistent performance of the company will dominate any other factor. Therefore, if the company is fundamentally strong, ignore the short-term price fluctuations and minor setbacks.

Also read: Why Warren Buffet Suggests- ‘Price Is What You Pay, Value Is What You Get’?

8. Keep an eye on fees & taxes

Frankly speaking, most of the newbie investors ignore the fees and taxes. How much can a 0.5% brokerage can affect their overall return, right? Moreover, why to worry about taxes. It’s a long way down to file the ITR.

WRONG!

Remember, you have to pay the brokerage (and many other expenses) on both sides of the transaction, i.e. when you’re buying or selling stocks. Moreover, even if you’re selling your stock in a loss, still you have to pay the brokerage. Besides, taxes are something which cannot be ignored. If you want to create real wealth over time, always mind this rule of successful investing. Keep an eagle eye on your fees and taxes.

9. Invest what you can, when you can.

Even an investment of Rs 500 is good enough to invest. Do not wait for your next bonus or next pay raise to start investing. Always remember that time frame plays an important role in the power of compounding. You do not need to start investing only when you have lakhs of money.

The easiest ‘hassle-free’ way to build a secure future is to invest what you can and when you can. Next time, whenever you have few spare changes, think about this last rule of successful investing.

Finally, to end this post here’s an amazing quote by Berkshire Hathaway Vice-Chairman, Charlie Munger–

charlie munger quote

Tags: Rules of Successful Investing, Rules of Successful Investing in stocks, Stock market Rules of Successful Investing

June 16, 2018 Investment Basics No comments yet
No-Nonsense way to use PE Ratio

No-Nonsense way to use PE Ratio.

PE Ratio is one of the most widely used fundamental ratios for evaluating the stocks. From Benjamin Graham’s time to the current world, the essence of PE ratio hasn’t changed.

In this post, I am going to explain how you can use Price to Earnings (PE) ratio the right way for comparing stocks. Further, we’ll also discuss how ‘not’ to use PE ratio.

Introduction to PE ratio:

Just looking at the share price of a company makes no sense.

Apollo Tyres is currently trading at a market price of Rs 267.15. What can you tell about the valuation of Apollo Tyres? Is it cheap or expensive?

Even if you are given two stocks and their share price, you cannot judge which one is under-valued and which one is over-valued. For example, here are the share prices of two tyre manufacturing companies:

JK Tyres (Rs 176.35);
Apollo Tyres (Rs 267.15)

Here, you cannot say that JK Tyres is under-priced just because its current market price is less than that of Apollo Tyres.

Even a company with a market share price of Rs 2,000 can be cheap and another company with share price of Rs 15 can be expensive.

The biggest problem while comparing companies based on share price is that the companies have different numbers of outstanding shares. That’s why we need a more relevant tool for comparing stocks.

One of the simplest tools that the investors are using to evaluate stocks is Price to Earnings ratio.

PE ratio is a simple evaluation tool for stocks, however, it can be difficult to interpret for the beginners.

From the name itself, you can explicate that it measures the market price of a company’s stock relative to its earnings. PE ratio of a company can be compared with that of other companies, unlike their current market price.

Here is an example of two companies- A and B from the banking sector.

Company A Company B
Earnings per share (EPS) 20 20
Current market price per share 450 650
Price to earning (PE) ratio 22.5 32.5

In the above table, you can notice that with the same earnings, company B is trading at a higher share price. Therefore, here we can say that company B is overvalued.

(Although there can be few other reasons for the market favoriting the company B [high PE] which we are going to discuss later in this post).

As a thumb rule, while comparing the PE ratio of two companies, the company with lower PE ratio can be considered undervalued. On the other hand, companies with higher PE ratio are over-valued.

Nevertheless, the comparison should be apple-to-apple. Comparing apple-to-oranges makes no sense. What I mean by apple-to-apple comparison is that both the companies should be from same industry. A banking company can be compared to another banking company. However, a banking company should not be compared with an automobile company based on their PE.

Also read:How to do the Relative Valuation of stocks?

How to calculate PE ratio?

The formula to calculate Price to earnings ratio is:

PE ratio = Price per share/ Earnings per share.

Many a time, the last 4 quarters earnings are taken as the annual EPS of a company while calculating PE. This is called trailing earnings as the past performance of the earnings is considered here.

NOTE: Trailing PE ratio is dynamic. It keeps on changing as the market stock price of the company consistently changes day-to-day. On the other hand, the earnings of the company are released every quarter.

As we are using the current market price and past earnings per share, the trailing PE ratio might show some higher value.

That’s why some investors prefer ‘forward PE’ or ‘leading PE’.

Here they use projected future earnings. The earnings of the company for the next 12 months is estimated for calculating the PE.

If forward PE is less than the trailing PE, this means that the EPS will increase in future. On the contrary, if forward PE is greater than the trailing PE means that the EPS will decline for that company.

Further, often the investors also find the historical average PE ratio of the stock to compare with its current PE ratio. Let’s say, you find the average yearly PE ratio for the last 5 consecutive years for a company. By comparing the current PE ratio with the historical PE ratio, you can evaluate whether the company is overpriced or underpriced, based on its own history.

There are few companies, who have zero profit or negative earnings. In such scenarios, the PE ratio doesn’t exist. Price to Earnings ratio is not interpretable for a non-profit making company until the company becomes profitable.

Quick note: PEG Ratio

While learning PE ratio, it’s also good to understand PEG ratio.

PEG ratio or Price/Earnings to growth ratio is used to find the value of a stock by taking in consideration company’s earnings growth. This ratio is considered to be more useful than PE ratio as PE ratio completely ignores the company’s growth rate.

PEG ratio can be calculated using this formula:

PEG ratio = (PE ratio/ Projected annual growth in earnings)

As a thumb rule, stocks with PEG ratio less than 1 are considered undervalued relative to their EPS growth rates, whereas those with ratios of more than 1 are considered overvalued.

Also read: #19 Most Important Financial Ratios for Investors

How to use PE ratio- the right way?

Theoretically, PE ratio tells how much investors are willing to pay against per share of earnings of that company. For example, if the PE ratio of a company is 30, it means that the investors are willing to pay Rs 30 per share, for the earnings of Rs 1.

That’s why a lower PE ratio is preferred. It means that you are paying less for the company for its per share earning of Rs 1.

Overall, PE ratio tells whether the company is trading at a premium or discount.

Now, you should always compare the PE ratio of the companies in the same industry (Apple-to-Apple comparison)

The PE ratio of the companies varies from industry to industry. The average PE ratio of some industries is higher than that of the other industry. This may be because of the market value of one industry above than the other, depending on its growth rate or business model.

For example, let’s compare the PE ratios of companies from two different industries. Here is the PE ratio of companies from oil and gas industry:

PE ratio - Oil and gas industry

And here is the PE ratio of companies from FMCG & Personal care industry:

PE Ratio- personal care industry

(Image source: Screener)

You can notice here that the PE ratio of most of the companies in Oil and gas industry is less than 25 and that of FMCG & Personal care is greater than 50.

Therefore, if you compare the PE of a company from oil and gas industry to that of another company in the Personal care industry, you will always find the oil and gas company cheaper. If you follow this apple-to-orange comparison approach, you will never be able to buy ‘apples’.

Further, there’s no universal rule for the PE ratio. For example, you cannot consider companies with PE less than 25 as undervalued in all Industry. For some industry, the average PE might be less than 25 and for others, the average might be greater than 25.

In short, while evaluating the companies based on PE ratio, always compare the company with its competitor or the industry. If the PE of a company is less than its competitors and the industry average, then it can be considered as undervalued.

Loopholes while using PE ratio:

While comparing PE ratio, low PE doesn’t always mean that the company is a good investment.

There may be some valid reasons why the market is hammering that company. For example, the company’s business model might be declining. Or the investors can notice financial trouble for the company in future. Further, there might not be any growth opportunity for that company, and that’s why it is trading at a low PE.

Low PE ratio might be considered as a discount. However, discount products are not always good.

Further, for a high PE ratio company, the investors might be looking at a high growth in the future and increase in earnings. That’s why they might be willing to pay a premium to buy that stock.

The biggest drawback of using PE ratio is that it doesn’t consider the growth aspects of the company.

Also read: Why Nobody Talks About VALUE TRAP? -The Bargain Hunter Dilemma

Conclusion

PE ratio is a simple and effective fundamental tool that gives a lot of information about the companies valuation. However, there are few loopholes when using PE ratio as a single deciding factor while investing in stocks.

While evaluating the PE ratio, always compare the PE of a company with the other companies in the same industry. You can also compare the current PE of the stock with that of market PE or company’s own historical PE ratios.

That’s all. I hope this post is useful to the readers.

If you are new to stocks and want to learn how to invest in Indian stock market from scratch, then here is an amazing online course: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your share market journey today.

#Happy Investing.

June 14, 2018 Investment Basics 7 comments
Is it a good strategy to buy one stock of Infosys, HUL & HDFC Bank per month

Is it a Good Strategy to Buy One Stock of Infosys, HUL & HDFC Bank Per Month?

Is it a good strategy to buy one stock of Infosys, HUL & HDFC Bank per month?

Many times it becomes difficult to find the right time to enter a stock? Finding whether the company is undervalued or over-valued can be a tedious job.

Obviously, here we are talking about entering into a fundamentally strong company that has a good track record of past performance and fantastic future growth potential. However, valuation is a significant part of investing and should be given utmost importance while making your investment decision.

In this post, we’ll discuss whether it is a good strategy to buy one stock of Infosys, HUL & HDFC Bank per month?

But, before learning further regarding this strategy, let’s quickly analyze the businesses of these three companies mentioned in this post.

A Quick Study of Infosys, HUL & HDFC Bank:

Infosys: It is a leader in the Information Technology Industry. Infosys is the second-largest Indian IT company by 2017 revenues and 596th largest public company in the world concerning revenue. It provides business consulting, information technology and outsourcing services. Currently, the market capitalization of Infosys is Rs 275,866 Crores and has given an amazing return to its shareholders in the past.

Also read: How to Earn Rs 13,08,672 From Just One Stock?

HUL is a market leader in the personal care industry. It has a substantially strong brand value with products like Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality Walls and Pureit.

HDFC Bank– HDFC Bank is India’s leading banking and financial service company. It is India’s largest private sector lender by assets. HDFC Bank provides many products and services which includes Wholesale banking, Retail banking, Treasury, Auto (car) Loans, Two Wheeler Loans, Personal Loans, Loan Against Property and Credit Cards. Read complete analysis of HDFC Bank here.

Disclaimer: This is not a stock recommendation. The examples used here are just to explain the strategy of monthly investing in diversified stocks. Please research the stock carefully before making any investment decision.

hdfc bank

Also read: How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?

Why can this strategy work?

“A good business is not a good investment if you overpay for it” -Warren Buffett.

What Mr. Buffett simply means is that if you buy a wonderful stock at a high valuation, the chances are that it will fall down to reach its real intrinsic value in future. (At a particular time in future, people will realize the stock’s true worth and the price of the stock will fall to reach its intrinsic value.) Therefore, even a good company doesn’t guarantee a good return if you overpay to purchase that stock.

Nevertheless, this problem of entering stocks at their true price can be avoided by purchasing an equal amount of stocks each month. It’s a fitting idea to invest monthly in diversified stocks. It will help you to avoid the dilemma of timing the market. You’ll be purchasing stocks on both the scenarios- whether the market is up or down.

Suppose a stock is going down week after week. Here, you have studied the stock and know that it’s fundamentally strong and capable of giving great returns in the long term. In such scenario, by consistently buying the stocks every month, you are averaging down the purchase price.

Similarly, if the stock is moving upwards every week, then again there can be few possibilities. Either you don’t buy and miss the opportunity of entering an astounding stock. Or purchase that stock at a high valuation. However, if you plan to invest systematically in that stock, you can avoid both these scenarios. You can make your position in the stock alongside reducing your purchase price by averaging down.

Also read: #3 Steps to Turn Your Investment Goals into Reality

Few Drawbacks of buying this strategy:

Like any other investing strategy, even this strategy is not perfect. Here are the few drawbacks of this strategy to buy one stock of Infosys, HUL & HDFC Bank per month:

  • Investing in just three stocks cannot be considered a diversified portfolio. Undoubtedly it is better than investing in only one stock. Nevertheless, if you want to reduce the risk, it’s better to invest in at least 4–5 stocks.
  • You might need to readjust your portfolio in future— Let’s say, one of the stock starts performing exceptionally well compared to the other. Here, the net allocation in that stock will increase significantly, and it might be possible that the distribution of other shares would become too little to affect your overall portfolio. Therefore, here you need to readjust your portfolio (add/sell) in future to make all the stocks equally proportionate to keep your portfolio diversified.
  • Last and biggest drawback- It’s really difficult to implement this strategy. Would you invest monthly in a stock if it’s price is going down consistently for the last one year? The problem is that people start to lose their patience and confidence (with time) in such scenarios.

To make this strategy work, you need to follow this approach strictly.

New to stocks? Confused where to begin?  Here’s an amazing online course for beginners: ‘HOW TO PICK WINNING STOCKS?‘ This course is currently available at a discount. 

Conclusion:

Although investing equal amount monthly in fundamentally strong large-cap stocks seems like a good idea. However, this strategy has few drawbacks as discussed above. Nevertheless, as long as you’re are monitoring your portfolio actively and re-adjusting your portfolio timely, this strategy can help you avoid the problem of timing the market and buying overvalued stocks.

Moreover, this strategy is more useful if you are investing for long-term (+15-20 years). This is because here you have averaged out the extremes (lowest and top-most price) and purchased the stock at a correct averaged price. If the business remains excellent and profitable, this strategy will undoubtedly give great returns to the investors.

Also read: How Many Stocks Should you own for a Diversified Portfolio?

June 13, 2018 Investment Basics, Stocks No comments yet
Low PEG Ratio in Indian Stock Market min

17 Companies With Low PEG Ratio in Indian Stock Market.

PEG Ratio in Indian stock market can be a handy indicator to find undervalued stocks with good future growth potential. It is a better alternative to the Price to earnings ratio (PE ratio) to find winning stocks.

In this post, we are going to discuss what is a PEG ratio and how to find good companies using PEG ratio in Indian stock market.

The Problem with PE Ratio.

If you’ve been involved in the market for a while, you might know that PE ratio is one of the most widely used ratios by the financial experts or investors. PE ratio refers to the price to earnings ratio.

It is simply calculated by dividing the price per share of a company with its earnings per share (EPS).

However, the biggest problem with the PE ratio is that it totally ignores the growth prospects of a company.

Here, you might be able to find a good undervalued company. However, if the growth aspect of that company is not bright, then it might not be an amazing investment.

Moreover, many times, finding undervalued companies based on just PE ratio leads to the value trap for the bargain investors.

The value traps are those stocks which are ‘not’ cheap because the market has not realized their true potential or because of some temporary setbacks. These stocks are trading at a cheap valuation because the company has either lost its fire or else its fire is fading away. The investors who buy such stocks just by evaluating its low valuation falls in the value trap.

Read more here— Why Nobody Talks About VALUE TRAP? -The Bargain Hunter Dilemma

What is PEG Ratio?

PEG ratio or Price to Earnings to growth ratio is used to find the value of a stock by taking in consideration company’s earnings growth.

In simple words, PEG Ratio is calculated by dividing PE ratio of a stock by its percentage EPS growth rate.

PEG ratio in Indian stock market shows at what premium the stock price is trading with relative to its earnings growth performance.

For example, suppose the price to earnings ratio (PE ratio) of a company is 20. 

And its earnings growth is 15% per year. 

Then, the PEG ratio for that stock can be calculated by:

PEG ratio= PE ratio/ % Earnings growth= 20/15=1.33

As a thumb rule, companies with lower PEG ratio in Indian stock market should be preferred.

For example, let’s assume there are two companies- Company A and company B in the same industry. if the PEG ratio of company A is 1.5 and PEG ratio of company B is 2.75, then company A should be preferred as it has a lower PEG ratio.

Further, you should always compare the PEG ratio of the companies in the same industry. PEG ratios can vary from industry to industry as the growth rate of one industry may be faster than the other one.

Anyways, a company with less than one PEG ratio in the Indian stock market can be considered decent.

Quick Tip: Never make your investment decision based on just one factor. Although PEG ratio can give you an answer to how cheap or expensive is the stock concerning the rate at which its earnings are presently rising. However, it doesn’t tell you the whole picture of the company.

Also read: #19 Most Important Financial Ratios for Investors

17 COMPANIES WITH LOW PEG RATIO IN INDIAN STOCK MARKET

There are thousands of stock in the Indian stock market. Therefore using PEG ratio to shortlist few good companies to investigate further ones can be a good approach. Here is the list of 17 companies with low PEG ratio in the Indian stock market.

17 COMPANIES WITH LOW PEG RATIO IN INDIAN STOCK MARKET-min

(Source: Screener)

Quick NOTE: I have used an elementary filter to find these stocks. The stocks mentioned above has a market capitalization higher than Rs 50,000 crores and a PEG ratio between zero to 1.5. An important point to highlight here is that the large-cap companies generally have reached saturation and have a lower EPS growth compared to the mid and small-cap companies. However, if you can find a fundamentally strong large cap (which gives decent dividends) with low PEG ratio, then it’s a beautiful scenario for a value investor.

New to stocks? Confused where to begin?  Here’s an amazing online course for beginners: ‘HOW TO PICK WINNING STOCKS?‘ This course is currently available at a discount. 

Conclusion:

PEG ratio is a very powerful tool to find undervalued companies with keeping in mind its growth prospects. Many financial experts consider PEG ratio to be more helpful than PE Ratio and this topic is still controversial.

However, for a smart investor- it doesn’t matters which one is better. The more important lesson here is how to use them to make an intelligent decision!!

Also read: No-Nonsense way to use PE Ratio.

June 12, 2018 Investment Basics, Stocks 2 comments
Right Amount to Invest

What is The Right Amount to Invest?

Whenever you ask any financial expert/advisor that what’s the right amount to invest, they will divert the question back to you saying it depends on your financial goals, risk appetite, investment time period etc..

But most people in India do not have much idea regarding their risk appetite or financial goals. They are just planning to invest because they want to make some additional money from the money they already have. Most Indians do not invest on the basis of their financial goals (like children’s education, buying a new house, retirement etc). They invest just because they need to make more money.

In this post, I’m going to give you a simple answer to the right amount to invest. (And no, I won’t ask your risk appetite or financial goals.)

What is the right amount to invest?

The Traditional Rule

As a rule of thumb, people should invest 10% of their earnings.

Therefore, if you are making an annual income of Rs ten lakhs (after taxes), you should invest Rs one lakh.

An important point to notice here is that you have to keep this percent constant (or increasing). For example, let’s say you got promoted next year and start getting an annual salary of Rs 15 lakhs. Then, from the next year, you should invest Rs 1.5 lakhs.

This is the general rule for the right amount to invest. If you read any popular personal finance books like ‘The Richest Man in Babylon’, you can find this 10% investment rule as the right amount to invest.

“Gold cometh gladly and in increasing quantity to any man who will put by not less than one-tenth of his earnings to create an estate for his future and that of his family.”
–The law of Gold, Richest Man in Babylon

richest man in babylon

The Modern Rule

Although the traditional rule of investing 10% of your earnings is widely popular and effective, however, the modern rule disagrees a little with this rule.

According to the evolved modern rule, you should invest as much as you can afford to invest.

Maybe it’s lower when you’re just starting, say 5%. However, with time you should increase this amount… 5%, 7%, 10%, 15%, 30% & more.

Let’s understand why this rule makes more sense.

If you’re a boy/girl who just graduated from a college and you’re starting your new career, you might have a lot of things to take care first. For example, you’ll be settling in a new city and there will be initial expenses. You might also have to get rid of your educational loans, buy basic amenities-materials, send some money to family/friends etc.

Here, the right amount to invest is as much as you can -without affecting your life. You do not need to invest 10% if your first month (or even first few months) just for the sake of investing. First, get the things settled. You can start to invest with 4%, and then move to 7%, 10%, 15% … in future.

The modern rule says that the right amount to invest totally depends on how much you can afford to invest.

On the other hand, if you’re in your 30s, 40s or above, then the chances are that you already have accumulated a large money to invest and you might have a settled life. Here, you can invest 20% or higher of your monthly/annual earnings (and further increase it with time).

An increasing investment amount and a long time horizon is a powerful combination to create wealth.

Also read: What Would You Rather Have: Rs 10 Lakhs Right Now or 1 Paise Doubled Every Day For 31 Days?

The big question- how to get money to invest?

The easiest solution to this problem is to live below your means. It simply means that your expenses should be less than your earnings. If you’re making annual earnings of Rs 10 lakhs, do not buy a Mustang priced Rs 65 lakhs.

Moreover, living below your means doesn’t mean living a miserable life. It simply means saving some amount (here and there) when it’s not necessary to spend.

For example, if you’re not earning in lakhs, maybe you can have a Motorola phone instead of iPhone X. Further, instead of dining out every day, you might wanna dine with your friends only two or three times a week. Also, instead of buying a new car on EMI, maybe you can opt for an Ola share or uber pool.

Even saving a little money in few small and big areas can help you save 10-15%- which you can invest.

Also read: The Easiest Asset Allocation Method- 100 Minus Your Age Rule

Quick Tip:

Automating your investment is the best alternative if you’re not a ‘Saver’. A monthly SIP directly deducted from your salary/savings account at the start of the month is a good option for those who are ‘Spenders’. You can’t spend the money which you don’t have, right? (Unless you take a loan or borrow money from your friends just to spend recklessly…). Automating your investment will help you to both enjoy your life now and have a secured future.

Final Note: Don’t forget the emergency fund

It’s always advisable to have an emergency fund… like next 6 month expenses or more.

Investing in stocks or any other financial assets has little risk associated with them. An emergency fund will help you take care of any unexpected expenses. Further, it can also act as your freedom. If you don’t have an emergency fund and you’re fully invested with no savings in the bank, you’ll have very less freedom to take immediate actions.

Besides, the amount in your emergency fund depends on your personal financial position. For example, if you’re planning to start your own business or startup, then you might want to have an emergency savings worth 9-12 months.

Conclusion:

There is no correct answer to the right amount to invest. The best answer is that the higher you invest, the better it is. Most people invest 10% of their earnings (as a thumb rule).

Nevertheless, a better alternative is to start with the percentage you’re comfortable to invest and then keep increasing the amount. Always invest the highest amount that you can afford to invest. Here, time and increasing contribution amount will help you build great wealth to secure your future.

Also read: What are Assets and Liabilities? A simple explanation.

June 9, 2018 Personal Finance 2 comments
Get Rid of- Confirmation Bias For Good

Confirmation Bias – Get Rid of it for Good!

Confirmation Bias – Get Rid of it for Good!

“People only listen what they like to listen” is a generic statement which has deep-rooted psychological meanings.

If you consider psychology and investment, both go hand in hand. Since the two are closely related, you would know that one changes (or alters) the effects of the other. One such psychological phenomenon is known as “Confirmation Bias”.

Let’s put this phenomenon forth with an example:

While purchasing a phone online, do you take the efforts to check for its reviews online? If yes, congratulations, you are an intelligent buyer.

However, the point is something different. Suppose that you really wanted to buy this phone for a very long time and have finally managed to have the savings to purchase it. Now, when you are reading the reviews, you would actually consider every positive review about the phone but will mentally decline the negative ones. Sounds familiar?

This concept is related to “Confirmation Bias”. Now, this was a basic idea just to give a glimpse of how this works to our readers. As we will proceed with this article, we will discuss a bit more about the confirmation bias and how it can affect your investment decision.

Human Mind and Biases:

As complex as our human mind is, scientists have been able to infer different phenomena related to the subconscious human mind. The confirmation bias is a result of one such phenomenon. Before moving further, let us discuss – what does the term bias mean?

When a human mind is determined towards one particular behavior, it subconsciously rejects the pieces of evidence against it while confirming the ones that go in its favor.

While we as human beings are found doing this all the time, these actions can be pretty dangerous while making an investment.

Also read: Loss Aversion- How it Can Ruin Your Investments?

Investment and the Confirmation Bias:

Psychologically speaking, an investor would be more inclined towards his pre-occupied information and knowledge about certain kinds of investing. While considering the pros and cons of a certain kind of investment, the buyer would most likely go with what he used to believe until now.

For example: Making an investment in Bitcoin is dangerous and pointless.

If this is an investor’s pre-occupied notion then he would most likely not invest in bitcoins in future. Moreover, the information that will be fed to the investor in favor of this notion would be acceptable to him. On the other hand, the information that would oppose this notion would be rejected by the investor.

bitcoins

Most obviously, this particular bias is not only limited to investment but prevails in almost each and every domain. If you notice closely, the confirmation bias restricts you to consider only one point of view and pushes you to almost reject the others which are lethal to decision making in investment. In fact, in order to make good investment decisions, one needs to consider a scenario multi-dimensionally.

If one fails to do so, he can make wrong investment decisions possibly incurring heavy losses in future.

Also read: Why Nobody Talks About VALUE TRAP? -The Bargain Hunter Dilemma

Confirmation Bias in the Stock Market:

There are various scenarios in the stock market where you can find confirmation bias influencing the investment decision of an investor. Here are few examples:

  • When an investor finds a ‘hot’ stock in any financial website/magazine, he/she will research it further only to prove that the supposed ‘potential’ is real. They might look at plenty of positive news regarding that stock. In the same time, they’ll ignore the red signs, just by making excuses like ‘It’s not going to affect the company much’.
  • If the stock price of a company starts falling, the investors start looking at all the negative flags only. Even if the setbacks are temporary and the company might have a good long-term future potential, however here the investors are more biased to the negative flags and totally ignore the positive factors concerning that stock.

confirmation bias stock market

New to stocks? Confused where to begin?  Here’s an amazing online course for beginners: ‘HOW TO PICK WINNING STOCKS?‘ This course is currently available at a discount. 

How to Avoid Confirmation Bias? 

The easiest approach to avoid confirmation bias while investing it to take an expert advice from a trained financial advisor.

Don’t we always take a second opinion from our friends or colleagues for every little thing we do? Be it selecting an outfit for an important event to taking major life decisions, a second opinion actually helps in backing up our decision. Therefore, you would want your second opinion to be totally unbiased and reasonable, wouldn’t you? That’s what expert advice is for.

Make sure that you ask for an advice from an experienced investor or from an expert financer. An expert advice makes you see the alternatives in a better way.

Nevertheless, with practice and experience, even an individual investor can avoid confirmation bias, without even taking help of an advisor. Here are two important steps that you need to contemplate in order to avoid confirmation bias.

1. Look at each and every dimension: Considering only pros or only cons about an investment would make the information partial (incomplete). Hence you need to view a scenario from different angles in order to make a backed-up decision.

2. Take some time before you pop a decision: Time is an important factor and it actually helps in unfolding various new information with it. An intelligent investor knows the amount of time he needs before he could finalize his decision. 

Conclusion:

Confirmation bias is not new to the investing world and do not regret if you have been following this psychology even without knowing. However, now that you understand that confirmation bias can adversely affect your investment decisions, you need to avoid it.

Although confirmation bias is a human instinct- nevertheless, you can control/avoid it with practice and experience.

Also read: Case Study: How 100 shares of WIPRO grew to be over Rs 3.28 crores in 27 years?

June 5, 2018 Investing Psychology No comments yet
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