13536 Views | April 29, 2019
As investors, we don’t generally like to admit this, but we make mistakes. Most mistakes committed by investors are related to emotions and irrational thinking. The issue is not the mistakes themselves, rather that they happen systematically, and that this results in mispricings in the market. While mispricings create opportunities for investors, it can be difficult to realise the benefits.
Most mistakes are behavioural. Here are two behavioural mistakes that investors must avoid – overreacting to news and aversion to uncertainty.
In general, people assign more value to recent information than the distant past. Consider this: Company A issues a guidance of expected headwinds in the next quarter. Most investors will rush to sell their holdings in this stock. This is a typical example of investors giving too much importance to recent information. While it’s good to keep track of recent developments, the point here is not to react to all information. Information that will impact the company’s business in the short term (for instance, a quarter in the example above) may not warrant a sell off if the company is fundamentally strong and has good long-term growth prospects. In fact, this overreaction to recent news provides rational investors with an opportunity to profit. For instance, if you refrain from selling the stock of Company A and instead, in case of a price dip, you accumulate more of the stock, you may end up making attractive gains over the long term since you would have bought at low price points thereby building a comfortable safety moat for yourself.
The key is to stay focused on the long-term prospects of the company and avoid getting swayed by short term developments.
Let’s now discuss the second mistake investors make:
Uncertainty implies risk of loss. Uncertainty is an integral part of the stock markets. However, investors are uncomfortable with this aspect of investing. But remember, uncertainty doesn’t always imply loss; it also implies the possibility of super-normal gains. Buying stocks at a large discount to their fundamental value gives investors room for error in case the outcome is negative. If a stock is cheap enough, a negative scenario may still result in a positive return. You can overcome the discomfort of uncertainty by doing sufficient research and analysis of the investments you plan to make and regularly monitoring your investments. This takes skill, time and effort. If you are unable to make this commitment, use the services of an investment advisor. You can also avail our free portfolio review service to know the quality of stocks you hold. Anyone is eligible for a Portfolio Review: there is no obligation to join our advisory services.
IN CONCLUSION – By focusing on long-term information and accepting uncertainty, we believe investors can make smart investment decisions.