Avoid these behavioural biases for investment success

Personal Finance | Published on 27th March 2019 | 1684

Avoid these behavioural biases for investment success

We often see that two persons with the same educational qualifications and intellectual pedigree differ vastly in their investment performance. There are people who can never get their equity investments to delivery above average returns. On the other hand, there are investors who seem to have the Midas-touch each time they enter stock markets. Is the difference between an average investor and a star investor only
about luck and being in the right place at the right time?

The actual answer to the above question may lie in hard facts and smart investing skills. But there is a lot more. Apart from good strategy and good execution, successful investors are also good at avoiding certain behavioural biases or preferences that keep you away from investment success. Remember, there is a major issue of behavioural biases in investing. That is because, our grooming conditions us to think and act in a particular manner and over time it becomes a habit or part of your investment behaviour.
Let us look at popular behavioural issues that stop investors from succeeding.

Lack of patience

If you do not have patience, forget about making your money grow. Investing is not for the short haul. That is trading. If you want to be a successful investor, you must overcome to react in impetuously in panic. Equity is all about participating in growth and wealth creation by a company and that takes time. The Indian IT sector first showed promise in the late 1980s but it was only by the late 1990s that it actually reached a tipping point and managed to reward investors. When equities reach a tipping point, the stock returns from that point is geometric. However, if you tend to panic at the slightest and do not have the patience and discipline to hold on to winning trades, then that is major roadblock for becoming a successful investor.

Lack of discipline

You cannot be a successful trader or an investor unless you have discipline. What exactly do we understand by discipline? A disciplined investor goes through two steps; first he plans the work and then he works the plan. If you miss out any of these steps then you are not a disciplined investor. The first step is not to get into investing without making a complete documentation of how you intend to identify stocks; how you will monitor positions, what will trigger decision shifts, etc? You need discipline to stick to your plan, keep stop losses, book profits, etc. Once you have made up your investment plan then you need the discipline to just stick to it.

Not having conviction in your pick

Don’t be greedy or fearful, when you should actually be feeling otherwise. Smart investors identify good buying opportunities when markets are extremely fearful and everyone is panicking in the market. Once you are clear in your conviction, have the courage go against the crowd when your research shows otherwise. Nobody got rewarded for adhering to herd mentality. This is as much a story of being brave as it is about being non-traditional. Look at it simply. We all go to attic sales and bargains to get the best product at lowest prices. This point becomes clear if you apply the same principle to stocks.

Risk capacity, risk tolerance not in sync

You are at behavioural risk if risk capacity and risk tolerance are not in sync.
Risk capacity refers to how much risk you can take, risk tolerance shows how much risk you are willing to take. For investment purposes, it is risk capacity that matters. But more importantly, for a successful investing your risk capacity and risk tolerance should be aligned to the extent possible. The behavioural problem comes when your risk capacity and risk tolerance are not aligned. If you have a higher risk capacity, but low risk tolerance then you are likely to make sub-optimal investments and these will
not create wealth. On the other hand, if you have low risk capacity but high risk tolerance, then you could be like the trader who prefers to play ducks and drakes with their money.

Procrastinating

Procrastination refers to postponing addressing the pressure points in your portfolio, hoping that things will take care of itself. For example, once you have made the decision to invest or divest a stock don’t wait too long for the execution. Use data to the extent possible and then go with your gut. Your gut rarely lets you down in an important decision. That is how the best of investors operate.

The Article has been authored by Mr. Rohit Ambosta, Chief Information Officer, Angel Broking. & it appeared on Mar 19, 2019, 06:50 AM IST, on the following website https://www.dnaindia.com