Have you ever lost money in the equity market not because of the market crash but due to harmful behavioral biases? If so, you’re not alone. You must have heard about psychological traps leading people in the wrong direction. This theory is not only applicable to life in general, but also it is a classical form of dysfunctional investor behavior. Ignoring the facts, falling in love with the company, not selling the stock at the right time are a few examples. This article outlines the various such traps investors fall prey to.
- Emotional, not Logical- The investment process is a roller coaster ride full of emotions. Many people tend to make decisions driven by emotions, and not logic. A study suggests that investors are more sensitive to losses than possible risk and return. Extreme euphoria, panic, stress, fear, greed can trigger investors to buy/sell stocks in odd situations. However, using rational and realistic thinking to understand when an investment may be in a development cycle is the key to evaluating attractive opportunities and resisting bad investing ideas.
- Fear of missing out (FOMO)- Trading accounts have almost doubled in the last two years. The stock market is replacing traditional investment options like gold and fixed deposits. Though it is good that people gain financial literacy, this can sometimes lead to psychological pitfalls. This year’s IPO market is a classic example of this. People were mindlessly investing even in loss-making companies because they were fascinated by the buzzwords like listing gains, oversubscription, etc. Amateur investors and newbies are the biggest prey. Do not get overwhelmed because sometimes ignorance is indeed bliss.
- Living in Denial- A common thing that can be seen amongst inexperienced investors is that they tend to buy stocks just because they love one or a few products of the company. ITC has disappointed people even when everyone loves Britannia biscuits. Falling in love with the company is another aspect that can harm your hard-earned money. Not exiting the position at the right time, ignoring the facts, living in denial will not get you profits. Remember, you’ve invested your earnings in gaining something out of it.
- Lack of Patience- Upon hearing about the significance of patience in the stock market, one always remembers Warren Buffet’s famous quote, “The stock market is the device for transferring money from the impatient to the patient”. Turnover, jumping in or out of the positions is a significant return killer. A slow and steady approach coupled with consistency will yield greater returns in the long run.“Pachees din me paisa double” is just a fantasy world. One needs to keep their expectations realistic about risk and return.
Bottom Line- Making mistakes is a part of any journey. One cannot avoid them altogether, but the most important thing is to learn from them. Developing a plan, opting for SIPs, knowing your goals can help you become a successful investor. A strategy that is useful to your friend may not be helpful to you. Do your research, talk to people, analyze the financials, and know the company’s future potential. Do not let your impulsive emotions drive your investment decisions. Even if you have been a victim of your own bad choices, accept it because you’re solely responsible for your money. Continuous learning is the key. After all, it is not gambling but an investment that can award you with high returns if done carefully.
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