The scale and dynamic nature of the stock market pose big challenges. How do you select stock to invest in? Is there a way to identify and manage stock opportunities in real time? What are the challenges to actually taking the decision?
The first thing that hits an investor is the large number of possibilities where he could put his money. There are about 5000 listed stocks in India while you need about 25 to 30 stocks in your portfolio at any point of time, the ‘right’ ones to succeed. Similarly there are hundreds of funds to choose from. Building and managing your portfolio effectively describes what you need to do to invest successfully. But decision making is tough but this is further amplified by the sales pitch, noise and din of the market, media, influencers etc. It’s mind-boggling.
Making Informed Decisions is in the Here and Now:
To make an informed decision on investing in a stock is not very different than making a decision to buy anything. You got to know if what you want to buy is worth buying, what is the price you should pay for it and should you buy it now or wait for a better price. But the complexity in investing is that while what you are buying carries the same name it is constantly changing and the answers to these three basic questions for a particular stock or mutual fund is not the same the last time you looked at it. And this is not just because of the external entity eg stock has changed in some ways but also because the seer has changed as has his understanding.
Heraclitus has said this beautifully “No man ever steps in the same river twice, for it's not the same river and he's not the same man.” Just change the river to the stock market and you have the most apt description of the investing in one line. Change it to a ‘moment’ and you have the cracked the secret code of Nirvana. No wonder all spiritual gurus end their long discourses on life saying it’s all Here and Now.
In the next few chapters I am going to focus on investing in stocks and will cover Mutual Funds later, separately in one chapter. Anyway, stocks are the underlying asset in funds, so understanding how to invest in them is essential for all equity investors. Many things written about investing in stocks are also valid for equity funds, right now stay focussed on stocks.
The fact is that stocks, the information you have and your interpretation of it are all dynamic, not static. Hence you will always be taking decisions based on the here and now, at least that what you should be doing. But the mind is not trained to accept this. Here’s what all can happen:
You will remember the last time you were considering the stock it was available at a lower price and tell yourself you’d better off waiting for that price. You are anchored to a past price
You will remember the last time you bought something despite your doubts and the price fell and you will put off...........Read More