Rahul was contemplating, as the volatility in the Indian equity market, especially post Diwali and more so in January and February this year, was not to his liking. His investments made during 2009 and 2010, which had gone up in many instances by more than 80%, was coming down rapidly and, in few cases, to the price at which he had originally bought. This yo-yo was not to his liking and he wanted to revisit his portfolio.
Some of his colleagues and friends had already sold the shares and were moving into debt funds, which was at least yielding returns in the range of 7-9%. He was also wondering whether this was the route to take.
Mickael Mangot in his book 50 Psychological Experiments for Investors has given an insight as to how the human biases play an important role in the journey of wealth creation or wealth destruction, for that matter.
Are you one of the investors, who:
* Never buys back equity shares of the company on which you have lost money?
* Likes to cut positions in losing stocks?
* Buys more stocks that has consistently gone down to average out?
* Buys more when the market is soaring?
* Sells winning stocks and keeps losing stocks in the portfolio?
* Takes more risks, when unexpected gains are raked in?
If yes, you are not the only one following the above. Those not following the above are more of an aberration rather than being the norm.
In this period of volatility, we would have been prey to averaging out our losing positions or selling our winning stocks in the falling market. While we cannot undo what has happened, we can strive for success going forward. We could have a control over our emotional behaviour when making investments.
Controlling emotions is as important as executing the next buy/sell transaction. You should have a basic ground rule to ensure that you don’t become a slave to your emotions.
Basically, one is buying a piece of business. Just as in farming, like fruits are borne only after a period of time. The same law of nature holds true for wealth creation too. You could have a run up/run down, but again, as said earlier, they are more of an aberration. Investing for wealth creation is based on long-term goals and they need to be revisited periodically to ensure that they are in line.
Say, if you have invested in a FMCG major in early 2007 and the stock remains at the same price range over the last four years, it is a let down.
Volatility is to be expected and this is a part of the market behaviour. If the stocks have been bought with a long-term horizon, the dips should be an opportunity to buy and not to be confused with value?averaging. One buys on dips only the fundamental stocks with growth story. One must look at stocks that has low debt in the books. At present, the cash in hand is as important as interest outflow could be a drag on the financials.
One must have own rules like after every 30% rise, will pull out some money and move it into liquid debt instruments. This will ensure that the decisions are not ruled by heart. It is hard to follow our path, the beaten path may not give the same result. Believe in yourself and do not listen to the noise.
Ben Graham in his book Intelligent Investor was not off the mark, when he said, ?Much more money has been made and kept by the ?ordinary people? who were temperamentally well suited for the investment process.?
* The author is founder and managing partner, Zeus WealthWays LLP