‘Speed kills’ is as applicable to investing as it is to driving on the roads
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Around the time when a bear market cycle is near its bottom or a bull market is at its peak, Indian investors remain singularly obsessed about one thing—finding new investment ideas. From a generic “have you come across anything interesting lately?”or a genial “do you really find value in this market?”or a more pointed “so what is your latest buy?”; rising markets make investors more hungry for new ideas.
In investor groups, people increasingly focus on investors with a high appetite for new ideas. The investor who keeps rattling out stock names and talks about every stock under the sun becomes the market equivalent of Santa Claus. People always look for him, waiting for him to open his bag of names. Everybody wants to get at least one name out of him. Bloggers, twitterati and savvy traders keep a close watch on dozens of such investors, hanging on to every word they say, participating in every idea they invest in, and keeping themselves abreast of their actions.
With WhatsApp and the many other ways of staying in touch, investors continually seek names of companies and pick up ideas from any source they can and scramble around to find new ideas. When the markets progress from bear-market lows to bull-market highs, investors slowly change the way they deal with ideas and how they handle themselves.
Around market bottoms, the best of ideas face sceptic reactions. Investors will find reasons, however trivial, to negate even sure-shot investment ideas. During such periods, reasons are invented to stop oneself from buying even the most obvious investment ideas. And as markets rally from the bottom, investors watch with disbelief how their own negativity has hurt them. Regret starts to grow, catalyzing a completely different behavioural pattern.
With every rally, the market gains more and more investors who feel they got left out. The anxiety to participate and past regret forces them to abandon their cautionary stance, and investors throw themselves at everything. As the market reaches new highs, most investors are too busy doing things they ought not to. And in the process, they set themselves up for investment mistakes they will regret.
In times like the present, one must learn to question oneself. Think out of the box. Leave the herd. Or else, there is a high probability of losing control over one’s investment behaviour. When markets are falling, those with too many investment ideas will lose more than the focussed, disciplined investor. There is an urgent need to become self-aware and introspect. Here are some behavioural symptoms that we must not ignore.
First, the time between hearing of an idea and buying that stock may shrink dramatically. Often, people can’t wait to buy and the purchase is made without any serious analysis.
Second, the decision to buy is made on the basis of the source and not on the merit of an individual idea. The investor recommending or owning the stock becomes a brand. If suffices to know that the person endorses a stock. People see no reason to think further. After all, where is the time?
Third, one’s own ideas look less attractive when compared to what others recommend. It feels worthwhile to spend more time observing what others are buying, than in doing one’s own research.
Fourth, in the desperation to own newer ideas, some investors sell their winning holdings just to create liquidity. The decision to sell merely supports a burning desire to buy and it has not been made diligently.
Lastly, when the market’s Santa opens his bag, the goodies that he throws out instantly hit the upper circuit and the market simply can’t have enough of them. Everybody talks about what went up that day only to forget about it 2 days later.
The principle flaw that creeps into one’s investment approach is the belief that rapid change is essential to maintain investment performance. As market’s fancy keeps shifting rapidly, the investor subconsciously begins to crave participation. This craving becomes the most important thing and keeping pace creates compulsive change. The consequences of this, on most portfolios, can be disastrous.
Often, at market peaks, mutual funds gather a lot of money in one particular theme. This mobilization also plays on an investors’ craving to participate. But rarely does such investment activity contribute to wealth creation. The adage ‘speed kills’ is just as applicable to investing. The investor must understand that speed in decision making and fast investment moves only raise risks while having low odds of delivering great rewards. When the downside is high and the upside is limited, the best decision is to pass over the opportunity.
If an investor is able and willing to read the symptoms early, she has a fair chance of correcting her mistakes before it is too late. It’s not any different this time around as well.
Shyam Sekhar is chief ideator at ithought