Saturday, 9 January 2016

Beware, Are You “Emotionally” Invested in Your Stock?

In the stock market, it is frequently seen that investors invest not only their money but also a good amount of self-esteem in their stocks. This is particularly true for fundamental analysts. The business of stock picking is one of the worst avenues to tie your self-worth with because you can easily go wrong with stocks. While going wrong with your stock selection isn’t much of a problem, sticking to a bad stock just because you have picked it certainly is. In the stock market, smartness lies in realizing when you are wrong and taking action.

Why do fundamental analysts fall prey to their own analysis? Because they have invested a lot of time in analyzing the stock and coming up with a story. In the process, they fall in love with their own brilliance and logic. So, when they find contradictory developments pulling down the stock, they take them as a blow on their egos. As a result, they stick to the stock, only to see it tumble further. Rather than appreciating the contrary developments as a negative, they interpret them according to their biases. On the other hand, a technical analyst is more nimble and quick to appreciate an error. This is because his judgment comes not from “inside” but from “outside,” i.e., from the charts and patterns he sees.

Though I don’t practice technical analysis, given its own problems, I support a model-based approach to stock investing. Models are complete systems that tell you what stock to buy, when to buy them, how to track them, and when to sell them. They shift the task of analysis from “inside” to “outside.” So, when you are wrong with a stock, the model will tell you and you need to act. When you are right, the model will tell you, so you need not worry about the market’s ups and downs.
The success in stock requires not only picking winning stocks but also containing your losses. Those who are dispassionate about their stocks actually have better chances of succeeding. Call it a paradox if you will.

No comments:

Post a Comment