How to avoid being a loser in the stock market
Emotional imbalance, lack of knowledge and a short-term view of the market has often proved disastrous for investors
Ever seen a hurdle race? Noticed how the athlete concentrates on overcoming the hurdles? How they time their leap at the right moment to sail smoothly over them? For these people the barrier is just a physical obstacle and not a mental one. It is the mind which has to be geared to overcome barriers. This rule holds true for investors too.
It happens often that investors behave in a manner just opposite to what they should be doing in the first place. Instead of concentrating on facts they are driven by rumours. They chase the elusive winning stock and trip on the hurdle, losing money as a result. These mental hurdles, which the investors encounter, can be overcome by identifying and eliminating them by following some simple rules.
1. Emotional imbalance
Emotion is a barrier which may look harmless and passive but it has the potential to wreck havoc and bruise the investor financially. ‘Buy low and sell high’ is a simple mantra which investors need to follow. They forget and instead often get afflicted by emotion, refusing to sell peaking stocks and ignoring potentially promising out-of-favour stocks. Holding on too long to losing stocks in the expectation that they will rise often never happens and financially the investor moves from bad to worse position.
2. Lack of knowledge
The reluctance to understand the working of the investment market can cost the investor dearly. Everyone wants to back a winner but sometimes this can be a malady; especially when such a winning streak is not sustainable. Investors tend to back a stock that shows strength without examining the reasons for its rise. This will inevitably lead to the stock’s downfall.
3. Myopic view
When investor takes a myopic view, they lose the sight of the big picture. They may know that thinking long-term is the key to the success of their investment, yet they become drawn to the short-term movement of the stock and end up losing focus and money.
Overcoming these hurdles
Whatever the barrier or hurdle, it can be tackled and eliminated with a systematic and pragmatic approach.
Here are some useful steps to help investors become agile and mentally fit hurdle runners:
Learn to monitor performances
‘Those who forget history are condemned to repeat it’. Learn from mistakes and keep a track of your performances. A rational approach would be to document the market and sector trend, the exit target and the trailing stop losses. This record is a useful manuscript for identifying barriers and getting around them.
Identify the weak behavioral patterns and rectify them
Introspection is the right action that investors need to undertake in order to find out their own behavioural weaknesses. Specifically, examining past investing patterns will help them pin point their successful as well as unsuccessful endeavours.
Stay committed to the changes necessary
What is to be changed is perhaps easier to identify than making the actual change. Bringing about a change in one’s behavioural pattern needs unwavering focus. A half-hearted attempt will not yield the desired result hence a temporary break from the investment routine is advisable to regain focus.
Gear up adequately to deal with losses
Coming to terms with losses is a point of maturity in an investor’s behaviour index. How to cope with losses, which are a part and parcel of the process of investment, is something an investor has to learn. Accepting the loss and moving on augurs well for the overall investment process.
Gather experience and expertise in one investing strategy
The data available on different investment strategies are overwhelming and can often become intimidating for an investor. Under such circumstances it is always better to avoid trying to become a ‘jack of all trades’, rather mastering one investment strategy is a useful policy to follow. It may result in the loss of some investment opportunities but will help the investor to gain confidence in the chosen process.
Learn to weigh alternative possibilities
Assessing the market, learning the subtle nuances and taking action accordingly will lead to an enhancement of the risk-reward evaluation process. Making a learned judgment based on the probabilities and market behaviour will yield positive results.
Adopt an objective approach
Often investors feel that the market will behave in a manner that they expect it to behave. More often than not, it is not so and the market behaves on its own terms. Investors will be best served if they stick to an objective approach.
A hurdle racer becomes a champion because s/he is disciplined and follows successful strategies. An investor too can be a winner by training herelf/himself to form and follow the successful investment strategies.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the director and chief financial planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at email@example.com.
Photographs: Dominic Xavier/Rediff.com