Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
Wednesday 14 April 2010
The more you know about your psychological biases, the better you can function in the volatile stock market.
The more you know about your psychological biases, the better you can function in the volatile stock market.
The entire market may be influenced by psychological reasons, not by fundamental reasons alone.
From an investment perspective, the bottom line is that the market will continue to fluctuate and give you solid opportunities every so often.
Value in the long run is determined by fundamentals, while short-term gyrations reflect market participants' psychological weaknesses, such as herding.
Knowledge is the best antidote to making wrong decisions.
If you are a long-term investor, the rational thing to do is to make decisions based on long-term fundamentals of the business.
Tuesday 2 September 2008
Strategies for Overcoming Psychological Biases
1. Understanding the Biases.
Pogo, the folk philosopher created by the cartoonist Walt Kelly, provided an insight that is particularly relevant for investors, "We have met the enemy - and it's us". So, understand your biases (the enemy within) as this is an important step in avoiding them.
2. Focus on the Big Picture.
Develop an investment policy and put it down on paper. Doing so will make you react less impulsively to the gyrations of the market.
3. Follow a Set of Quantitative Investment Criteria.
It is helpful to use a set of quantitative criteria such as
- the price-earnings ratio being not more than 15,
- the price to book ratio not more than 5,
- the growth rate of earnings being at least 12%, and so on.
4. Diversify
If you own a fairly diversified portfolio of say 12 to 15 stocks from different industries, you are less prone to do something drastically when you incur losses in one or two stocks because these losses are likely to be offset by gains elsewhere.
5. Control Your Investment Environment
If you are on a diet, you should not have tempting sweets and savouries on your dining table. Likewise, if you want to discipline your investment activity, you should regulate or control your investment environment. Here are some ways of doing so:
- Check your stocks only once every month.
- Trade only once every month and preferably on the same day of the month.
- Review your portfolio once or twice a year.
6. Strive to Earn Market Returns
Seek to earn returns in line with what the market offers. If you strive to outperform the market, you are likely to succumb to psychological biases.
7. Review Your Biases Periodically
Once in a year, review your psychological biases. This will throw up pointers to contain such biases in the future.