As shoppers we fall into two categories:
Those who go shopping with a general idea of what they want, visit various shops, explore and buy various things, some not originally seen as required.
Those who go shopping with a list of what they want, go to a specific place and buy only what’s on their list.
All of us perhaps do both, but we can’t deny we have a preference, a natural inclination. But it is not difficult to find out if we really fit Category 2 – just ask yourself when was the last time you made a real (not mental) list of things to buy before going shopping. Chances are that most of us will realize we belong to Category 1.
However, men, we suspect will be shouting in their heads, Category 1 describes women shoppers aptly, and we can’t belong to this category. Think about the stuff you buy and ask yourself did this feature on your shopping list. How many times have we suffered pangs of regret of having bought something, either because we realize we did not quite need it or it does not suit our requirements fully or think we could have bought it later and probably cheaper. Well if you can’t find examples of your Category 1 behaviour while buying clothes, books, music etc look at the way you buy stocks.
Do you go to the stock market, your trading portal, with a clear list of what to buy and what price and never without it? The latter part is very important. Many people work in reverse; they have some money and go about asking people what are the ‘good’ stock to buy now? Loaded with money and half baked, poor analysis they are ready to enter the stock market; a market that is far more dazzling than any shopping mall you will ever visit. And what do you expect will happen? You will be swayed by what is happening there, by people chasing the latest fad and by our own fear of losing yet another chance if we don’t act now. There is no hope of anyone making sound investment decisions this way, the Category 1 way of shopping.
So, how should we shop in the stock market?
1) Making a list of stock to buy in a rational state of mind:
As already said above, most of us do not think about making a list of what stocks to buy unless we are ready to enter the stock markets, loaded with money. And in our frenzy of wanting to invest this money, we end up listening to numerous tips and recommendations available from various sources. The solution to avoid this chaos is to have a pre-defined list of not only which stocks we want to buy or sell but also the price at which we want to buy/sell these stocks. And making this list when nothing much is happening in the markets i.e. in a rational state is at the crux of getting our investment decisions right.
2) Pre-commitment to act:
The best time to buy is when the market is fearful and to sell is when it is greedy. So, we should do exactly opposite of what the market does i.e. be a selective contrarian investor, like investment gurus Benjamin Graham & Warren Buffett. But this is easier said than done. In reality, it can be hard to stand against the tide and buy when everyone is busy selling. So, when the time comes for us to act upon our own decisions, we get cold feet and keep postponing them. But having a list of stocks to buy from is useless until we act upon it. Becoming a confident and successful investor requires a pre-commitment to act.
Here, one could be well served to follow Salman Khan’s ideology from the movie ‘Wanted’, “Maine ek baar commitment kar li, toh main khud ki bhi nahi sunta!” 🙂
So, once we have our checklist of stocks created in a rational state of mind, we should set triggers on the prices we would like to buy/sell them at and act on those triggers no matter what. The only time we change our decisions should be when we have news leading to a fundamental change in the company which would change our analysis altogether, for e.g. Loss of a competitive advantage by a company or change in industry dynamics.