While a lot of book has written on the financial & business aspect of investing, but there are only a few that covers the behavioral part of investing. “Stock to Riches” by Parag Parikh is one of the best among them.
The book is written by Late Mr Parag Parikh, a well-known Value investor. He also had started his Mutual fund by the name “Parag Parikh Long Term Equity Fund(PPFAS) which has assets worth ₹1300+ Cr as on date.
“Stock to riches” talk about the decision-making part of the market as to deciding when to buy or sell, when to churn your portfolio, how much of portfolio to attribute to particular stock etc. And believe me this part of the investing is equally important & equivalent to finding the right stocks/ doing the fundamental research in terms of creating wealth.
Key Pointers- Stock to Riches
1. Loss Aversion: We as human don’t want to be at the losing side of anything, be it an investment. We do this by booking profit early or holding our losing position for quite a long time.
2. Price anchoring: We get anchored to prices rather than look at fair value of the company. Let me give you an example. Suppose you hold the shares of a company at ₹100 and some accounting fraud came to light. Now the share prices dropped from ₹100 to ₹50 and then again jumped from ₹50 to ₹75. You could not sell the shares at ₹75 expecting more recovery in the price. And then the price drops to ₹40. One gets anchored to the price of ₹75 rather than selling at ₹40 i.e. keep waiting to get back the price of ₹75.
3. If certain stocks have been giving good returns for some time, it is assumed that it will continue to do well. Many a times we set a target price and post reaching we get greedy. {That’s the case with me & I am working to improve on it}
Pointers explained by Behavioral Finance
Decision Paralysis
If you are in the market, you need to make decision several times in a day/week. These decisions are very important in determining if we make money in the market & how much we make.
According to the book, we avoid taking decisions because of:
1. The fear of going wrong
2. Possibility of losing
3. Avoid looking foolish
4. Unwillingness to take the risk
5. We have set up a hypothesis of investing & that has gone wrong.
How to deal with Decision Paralysis?
1. Deciding not to decide is also a decision: You will come across many situations when after giving a good thought, you will realize that it’s better not to do anything. There would be some abrupt movement by indices without some solid reason every now & then.
2. Consider opportunity cost: When you are not investing in stocks, think about what are you losing out in doing so. Equity market has been the best investment vehicle created till date.
3. Put yourself into autopilot mode: This basically talks about Systematic Investment Plan (SIP).
4. Change your frame of reference: If you are not able to take any particular decision, it’s better to look at that from some other point of view.
5. Don’t get married to your stocks: The purpose of investing in the market is to maximize your gains. So, one should always be open to switch your holdings that best suits the need of the hour.
6. Understand that there is no free lunch: You won’t get anything for free. There is a price for everything.
7. Learn to apply the Dale Carnegie principle on worry: At the time of taking decision think of the worst case in case the outcome of the decision does not go in your favor. That will remove many worries & hold your nerves steady at the time of panic.
I would like to add one more point.
8. Plan & prepare: It helps immensely to be mentally prepared. Create certain pointers that need to be followed as well as decide on the buying & selling prices also helps. No one can be perfect while deciding the buying & selling prices, so in order to reduce your error of judgement, its better do buying & sell in phases.
Stock to Riches: Few more pointers
Patience is a virtue in stock market.
The seed has to endure summer, rain, winter and spring before it turns into a full blown tree.
In equity investment, one needs to understand the law of nature. Whatever goes up must come down & vice versa.
Life is simple, we make it complicated.
If you were emotionally strong & you had bought when others were panicking, you would have ended making a huge fortune.
A 6 month review of portfolio is frequent enough
Further Reading:
By,
Shekhar Yadav