While farming is dictated by the weather, the stock market fluctuates to sentiment.
The general public often price the stocks poorly, thus the volatilities in some stocks.
Often the pricing is about right, at certain times, it is definitely wrong.
Thus the importance of distinguishing price from value.
It is better to be approximately right than be absolutely wrong.
At a certain price, a stock is a bargain.
When you buy a stock, do not expect to buy at the bottom.
Be prepared to see the stock price goes lower than your buying price in the short term.
Your goal is in the long term, the price should be higher than your buying price.
Similarly, when selling a stock for good reasons, do not expect to sell at the very top.
Be prepared to see the stock price going up further after you sell.
In the long term, if your reasoning is correct, the price should be lower than your selling price.
Under this circumstance, the buyer's regret of not buying at the lowest price is irrational.
Under this circumstance, the seller's remorse of not selling at the highest price is irrational.
Through understanding these, you will be a better and rational investor.
Showing posts with label Regret. Show all posts
Showing posts with label Regret. Show all posts
Wednesday, 7 April 2010
Thursday, 2 April 2009
Why investors behave the way they do
Why investors behave the way they do
Published: 2009/04/01
Learning from other market players’ mistakes; analysing how and what they think, can help an investor emerge as a winner in the market
In recent years, behavioural finance has been gaining grounds in trying to explain the financial anomalies in the stock market. These anomalies, which cannot be addressed by traditional financial theory such as the market efficiency theory may sound purely theoretical, but you cannot brush aside the need to understand the psychology of investors as it plays a big part in driving the stock market.
What is Behavioural Finance?
Behavioural finance is the study to explain the financial behaviour from the psychological aspect. Over the years, market psychologists have discovered that the two primary emotions that drive investors' risk-taking behaviour are hope and fear. There are a few key behavioural concepts that will help us to understand why some of us behave in certain ways when it comes to making investment decisions. In this article, we talk about four of such concepts:
* Regret theory
Regret, a simple enough concept to understand by any layman, refers to the emotional experience that one goes through when confronted with the wrong decision that he or she has made. It manifests itself in the form of pain when one feels responsible for not doing the right thing. When you look back at your investment history, try to recall the state you were in when you missed the chance to cut losses or missed the opportunity to buy a stock that you knew you should have bought because it was considered a good buy. Try and remember how you felt when the price of that particular stock that you did not buy increased subsequently. This emotion often becomes embedded in someone's mind in such a way that it regulates his or her future actions and decisions.
As a result, most investors make it a habit to avoid selling a loss-making stock and instead hope that the price will rebound eventually - all this, to avoid the feeling of regret. They would much rather make a paper loss than admit that they have made a mistake. In some cases, where the bad decisions happen to be recommended by their financial advisers, investors will put the blame on the advisers to avoid regret.
* Prospect theory
Prospect theory developed by Daniel Kahneman and Amos Tversky (1979), states that "we have an irrational tendency to be less willing to gamble with profits than with losses". Kahneman and Tversky found that when confronted with the choice between accepting a sure loss and taking a chance, most people will choose the latter. This phenomenon is called "loss aversion", which basically means that in general, people hate to lose. So, when faced with a situation involving loss, they become risk takers; they take the chance even if there is only the slightest hope of not having to lose.
On the other hand, when presented with a sure gain, they usually become risk-averse. Investors who behave this way tend to mark their stocks to the price that they originally paid to secure them and not to market. As such, they aim to get even before closing out a position. This type of investors usually ends up holding on to their loss-making stocks for far too long, which may very well prove detrimental to them in the end.
* Overconfidence
It is human nature for us to over-estimate our abilities and shower ourselves with a little too much confidence, i.e, overconfidence. Studies show that investors are often overconfident when it comes to their ability to predict the market's direction. Oddly enough, this is something that is more prominent among novice investors. Compared to experienced investors, those who are new to the market tend to set higher return expectations and end up being overwhelmed by the unfavourable outcome. As a result of overconfidence, some investors tend to trade too frequently only to get unsatisfactory returns or worse yet, losses. With the convenience of online trading, some even quit their full-time jobs to do day trading, thinking that they have the ability to predict the market and earn fast money. These are the people that usually end up getting burned if they do so without proper understanding of what they have been buying and selling, especially when the market is highly volatile.
* Anchoring
This is a behavioural phenomenon in which people tend to extrapolate the past into the future, putting heavier weight on the recent past. At times, when there are new announcements from companies, analysts fail to adjust their earnings forecast for the companies to reflect the latest information due to the anchoring effect. As a result, they land themselves with a few surprises when positive news become more positive and vice versa.
What has been discussed above are a few common behavioural phenomena experienced by investors that are useful to know. By understanding the psychology behind investors' behaviours, you can learn to recognise mistakes and avoid making such mistakes yourself. Learning from other market players' mistakes; analysing how and what they think, can help you emerge as a winner in the market.
Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission, Malaysia. It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC9/Article/
» RELATED STORIES
What causes stock prices to move?
Shield yourself from scams
Raising children to be 'money-smart'
Key habits of successful investors
Understanding effects of economic indicators on stock market
Insight into bonds
Published: 2009/04/01
Learning from other market players’ mistakes; analysing how and what they think, can help an investor emerge as a winner in the market
In recent years, behavioural finance has been gaining grounds in trying to explain the financial anomalies in the stock market. These anomalies, which cannot be addressed by traditional financial theory such as the market efficiency theory may sound purely theoretical, but you cannot brush aside the need to understand the psychology of investors as it plays a big part in driving the stock market.
What is Behavioural Finance?
Behavioural finance is the study to explain the financial behaviour from the psychological aspect. Over the years, market psychologists have discovered that the two primary emotions that drive investors' risk-taking behaviour are hope and fear. There are a few key behavioural concepts that will help us to understand why some of us behave in certain ways when it comes to making investment decisions. In this article, we talk about four of such concepts:
* Regret theory
Regret, a simple enough concept to understand by any layman, refers to the emotional experience that one goes through when confronted with the wrong decision that he or she has made. It manifests itself in the form of pain when one feels responsible for not doing the right thing. When you look back at your investment history, try to recall the state you were in when you missed the chance to cut losses or missed the opportunity to buy a stock that you knew you should have bought because it was considered a good buy. Try and remember how you felt when the price of that particular stock that you did not buy increased subsequently. This emotion often becomes embedded in someone's mind in such a way that it regulates his or her future actions and decisions.
As a result, most investors make it a habit to avoid selling a loss-making stock and instead hope that the price will rebound eventually - all this, to avoid the feeling of regret. They would much rather make a paper loss than admit that they have made a mistake. In some cases, where the bad decisions happen to be recommended by their financial advisers, investors will put the blame on the advisers to avoid regret.
* Prospect theory
Prospect theory developed by Daniel Kahneman and Amos Tversky (1979), states that "we have an irrational tendency to be less willing to gamble with profits than with losses". Kahneman and Tversky found that when confronted with the choice between accepting a sure loss and taking a chance, most people will choose the latter. This phenomenon is called "loss aversion", which basically means that in general, people hate to lose. So, when faced with a situation involving loss, they become risk takers; they take the chance even if there is only the slightest hope of not having to lose.
On the other hand, when presented with a sure gain, they usually become risk-averse. Investors who behave this way tend to mark their stocks to the price that they originally paid to secure them and not to market. As such, they aim to get even before closing out a position. This type of investors usually ends up holding on to their loss-making stocks for far too long, which may very well prove detrimental to them in the end.
* Overconfidence
It is human nature for us to over-estimate our abilities and shower ourselves with a little too much confidence, i.e, overconfidence. Studies show that investors are often overconfident when it comes to their ability to predict the market's direction. Oddly enough, this is something that is more prominent among novice investors. Compared to experienced investors, those who are new to the market tend to set higher return expectations and end up being overwhelmed by the unfavourable outcome. As a result of overconfidence, some investors tend to trade too frequently only to get unsatisfactory returns or worse yet, losses. With the convenience of online trading, some even quit their full-time jobs to do day trading, thinking that they have the ability to predict the market and earn fast money. These are the people that usually end up getting burned if they do so without proper understanding of what they have been buying and selling, especially when the market is highly volatile.
* Anchoring
This is a behavioural phenomenon in which people tend to extrapolate the past into the future, putting heavier weight on the recent past. At times, when there are new announcements from companies, analysts fail to adjust their earnings forecast for the companies to reflect the latest information due to the anchoring effect. As a result, they land themselves with a few surprises when positive news become more positive and vice versa.
What has been discussed above are a few common behavioural phenomena experienced by investors that are useful to know. By understanding the psychology behind investors' behaviours, you can learn to recognise mistakes and avoid making such mistakes yourself. Learning from other market players' mistakes; analysing how and what they think, can help you emerge as a winner in the market.
Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission, Malaysia. It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC9/Article/
» RELATED STORIES
What causes stock prices to move?
Shield yourself from scams
Raising children to be 'money-smart'
Key habits of successful investors
Understanding effects of economic indicators on stock market
Insight into bonds
Thursday, 9 October 2008
One success can wipe out 10,000 failures.
Harness the stunning power of financial regret
Regret over past financial decisions can have a powerful hold on you.
At 23, you may regret running up $20,000 in credit card debt during college. At 35, you may regret never having gone to college. At 45, you may regret having never started that consulting business you always dreamed of pursing. And at 65, you may regret not having saved more for retirement. In recent days, many financial chickens have come home to roost.
Regret, financial or otherwise, can have a powerful grip on your life. For most, the question is not whether you have financial regret. The question is how you harness the power of that regret to make sound financial decisions today that you will not regret tomorrow.
Here are some ideas to help you do just that:
We all have made stupid financial decisions. Even Warren Buffett has made dumb investments, which he readily admits. We can spend a lot of time and energy lamenting those past decisions, but it will not help us make better decisions today. We need to stop obsessing about the past and, instead, use the lessons it can teach us to make better decisions today.
It is better to look ahead and prepare than to look back and regret. -- Jackie Joyner-Kersee
Regret for wasted time is more wasted time. -- Mason Cooley
Learn from that which you regret. If regret has any positive value, it comes from evaluating the decisions you made that caused the regret. Take out a piece of paper and write down your financial regrets in as much detail as possible. Think about not only regrets from things you did, but also regrets from things you chose not to do. It is the things we did not do that often cause the most pain. We will use this list of regrets to make new and fresh decisions today that can at least keep the regretful decisions from continuing.
Never regret. If it's good, it's wonderful. If it's bad, it's experience. -- Victoria Holt
Regret for the things we did can be tempered by time; it is regret for the things we did not do that is inconsolable. -- Sidney J. Harris
To regret deeply is to live afresh. -- Henry David Thoreau
It is never too late. Reread the quote from Sidney Harris above. Does it describe any of the financial regrets you wrote down on the piece of paper? In most cases, our most profound regrets come from things we were too scared or busy or distracted to do. Whether it was going into business, going to college, or investing in the stock market, what we chose not to do can be a major source of regret.
If you are reading this article, it is not too late. Many go to college during retirement, or start investing in their 50s (or later), or start a business only after retiring from a career. Sometimes we convince ourselves that it is too late to accomplish this or that because it eases the pain of regret. But it is a lie. Believing that it is too late to change may make us feel better, but it also causes us to repeat the same inaction that caused the regret in the first place. Look at it this way. If you are 45 and considering getting a college degree, you have two choices: turn 50 with a college degree, or turn 50 without one.
There is no old age. There is, as there always was, just you. -- Carol Matthau
Do not go gentle into that good night,
Old age should burn and rave at close of day;
Rage, rage against the dying of the light. -- Dylan Thomas
Change the bad habits. Many regrets are born out of a lifetime of small, insignificant bad money-management decisions. You may have lived for years spending just a little more than you make. But after a lifetime of such living, you find yourself in unimaginable debt, with little or no savings. It wasn't one big mistake, it was thousands of small financial missteps. If that describes some of the regrets you have written down, changing those bad habits will be much like breaking free from addiction.
People are addicted to eating out. They are addicting to shopping. They are addicted to their gadgets. Of course, nothing is wrong with any of these things if you are properly managing your money. But if you are not, these are some of the daily, weekly and monthly decisions you make that have added up over a lifetime to create the financial regret you now experience.
As a starting point, wipe your financial slate clean. Put your past financial decisions where they belong, in the past. The question now is what financial decisions are you going to make today. If regret is born out of uncontrollable shopping, put something else in your life to take the place of the shopping. Ask a friend to hold you accountable. Give your spouse your cash and credit cards to hold for you. Do whatever it takes so that tomorrow you will not regret the decisions you make today.
My one regret in life is that I am not someone else. -- Woody Allen
Focus on today and tomorrow, not yesterday. Take another look at that piece of paper that lists all of your financial regrets. That paper represents the past. Take stock of the regrets, and make decisions today so that those regrets do not repeat themselves. And once you have done that, throw the paper away. Make decisions today so that tomorrow you will look back without regret.
When one door closes, another door opens; but we often look so long and so regretfully upon the closed door that we do not see the ones which open for us. -- Alexander Graham Bell
All saints have a past; all sinners have a future. -- Warren Buffett
Regret is a stunningly powerful emotion. Allowed to run amok, regret can ruin a life and even a family. With some honest introspection, however, you can turn that powerful emotion into a motivator that helps you make better choices today. Whatever your past, make today great, so tomorrow can be even better.
One success can wipe out 10,000 failures. -- The Dough Roller
http://blogs.moneycentral.msn.com/smartspending/archive/2008/10/08/harness-the-stunning-power-of-financial-regret.aspx
Regret over past financial decisions can have a powerful hold on you.
At 23, you may regret running up $20,000 in credit card debt during college. At 35, you may regret never having gone to college. At 45, you may regret having never started that consulting business you always dreamed of pursing. And at 65, you may regret not having saved more for retirement. In recent days, many financial chickens have come home to roost.
Regret, financial or otherwise, can have a powerful grip on your life. For most, the question is not whether you have financial regret. The question is how you harness the power of that regret to make sound financial decisions today that you will not regret tomorrow.
Here are some ideas to help you do just that:
We all have made stupid financial decisions. Even Warren Buffett has made dumb investments, which he readily admits. We can spend a lot of time and energy lamenting those past decisions, but it will not help us make better decisions today. We need to stop obsessing about the past and, instead, use the lessons it can teach us to make better decisions today.
It is better to look ahead and prepare than to look back and regret. -- Jackie Joyner-Kersee
Regret for wasted time is more wasted time. -- Mason Cooley
Learn from that which you regret. If regret has any positive value, it comes from evaluating the decisions you made that caused the regret. Take out a piece of paper and write down your financial regrets in as much detail as possible. Think about not only regrets from things you did, but also regrets from things you chose not to do. It is the things we did not do that often cause the most pain. We will use this list of regrets to make new and fresh decisions today that can at least keep the regretful decisions from continuing.
Never regret. If it's good, it's wonderful. If it's bad, it's experience. -- Victoria Holt
Regret for the things we did can be tempered by time; it is regret for the things we did not do that is inconsolable. -- Sidney J. Harris
To regret deeply is to live afresh. -- Henry David Thoreau
It is never too late. Reread the quote from Sidney Harris above. Does it describe any of the financial regrets you wrote down on the piece of paper? In most cases, our most profound regrets come from things we were too scared or busy or distracted to do. Whether it was going into business, going to college, or investing in the stock market, what we chose not to do can be a major source of regret.
If you are reading this article, it is not too late. Many go to college during retirement, or start investing in their 50s (or later), or start a business only after retiring from a career. Sometimes we convince ourselves that it is too late to accomplish this or that because it eases the pain of regret. But it is a lie. Believing that it is too late to change may make us feel better, but it also causes us to repeat the same inaction that caused the regret in the first place. Look at it this way. If you are 45 and considering getting a college degree, you have two choices: turn 50 with a college degree, or turn 50 without one.
There is no old age. There is, as there always was, just you. -- Carol Matthau
Do not go gentle into that good night,
Old age should burn and rave at close of day;
Rage, rage against the dying of the light. -- Dylan Thomas
Change the bad habits. Many regrets are born out of a lifetime of small, insignificant bad money-management decisions. You may have lived for years spending just a little more than you make. But after a lifetime of such living, you find yourself in unimaginable debt, with little or no savings. It wasn't one big mistake, it was thousands of small financial missteps. If that describes some of the regrets you have written down, changing those bad habits will be much like breaking free from addiction.
People are addicted to eating out. They are addicting to shopping. They are addicted to their gadgets. Of course, nothing is wrong with any of these things if you are properly managing your money. But if you are not, these are some of the daily, weekly and monthly decisions you make that have added up over a lifetime to create the financial regret you now experience.
As a starting point, wipe your financial slate clean. Put your past financial decisions where they belong, in the past. The question now is what financial decisions are you going to make today. If regret is born out of uncontrollable shopping, put something else in your life to take the place of the shopping. Ask a friend to hold you accountable. Give your spouse your cash and credit cards to hold for you. Do whatever it takes so that tomorrow you will not regret the decisions you make today.
My one regret in life is that I am not someone else. -- Woody Allen
Focus on today and tomorrow, not yesterday. Take another look at that piece of paper that lists all of your financial regrets. That paper represents the past. Take stock of the regrets, and make decisions today so that those regrets do not repeat themselves. And once you have done that, throw the paper away. Make decisions today so that tomorrow you will look back without regret.
When one door closes, another door opens; but we often look so long and so regretfully upon the closed door that we do not see the ones which open for us. -- Alexander Graham Bell
All saints have a past; all sinners have a future. -- Warren Buffett
Regret is a stunningly powerful emotion. Allowed to run amok, regret can ruin a life and even a family. With some honest introspection, however, you can turn that powerful emotion into a motivator that helps you make better choices today. Whatever your past, make today great, so tomorrow can be even better.
One success can wipe out 10,000 failures. -- The Dough Roller
http://blogs.moneycentral.msn.com/smartspending/archive/2008/10/08/harness-the-stunning-power-of-financial-regret.aspx
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