Peter Lynch once famously said – ‘An important key to investing is to remember that stocks are not lottery tickets.’ A lottery is pure luck and those who buy it are hoping they win it. But hope is not a strategy in any field, least of all in stock investment.
Unfortunately, many base their investments on hope – hope the market or stock will keep on rising or hoping for it to fall before buying. Then there’s the blind hope for tips, advice, and recommendations to work out. The alternative is to follow a sound decision-making process and make informed decisions.
You will still not be right all the time; no one is. At times the market will throw up outcomes that no one can predict. But while you cannot control what the market does, you need a way to control what you can – yourself, your decisions, and through this approach, your portfolio.
Here’s what will be different when you take the time to understand what investing process you should follow and how to make every stock investing decision-based on this.
Greed, FOMO, and other Emotions Stop Driving You
Emotions like Greed and Fear of Missing Out (FOMO) are perhaps the biggest driver or motivator that brings new investors and ambitious savers to the stock market. But once here, investing decisions driven by emotions cause nothing but grief!
Listening to the media including social media influencers or celebrity gurus amplifies these emotions that are latent in us. The problem is not the decision to enter or invest in the stock market; it is the rush to do so driven by Greed and more so by FOMO that leads to mistakes.
Sometimes these mistakes become obvious after a time lag. For instance, in a bull market scenario where new investors are all enjoying what is called ‘Beginners’ Luck’, buying becomes the overarching theme. Sooner or later investors realize that they shouldn’t have let emotions take the wheels, and saved themselves from investing in stocks at too-high prices or at the wrong time.
It is wise to acknowledge the role of luck and use the positive energy to find an investment decision-making process. At the same time, you need to ask questions such as:
- How to know if a stock is investment-worthy?
- What is the right price to buy it at?
- How much to buy?
- When to sell?
- Also, is there is good financial advice available, backed by transparent research to aid in your investment decision-making?
You Always Remain In Control
Have you ever placed a bet, even a friendly one, say on the outcome of an IPL match? As the match progressed and the results drew nearer, the intensity of your emotions would have increased and that is not just because it is cricket. You cannot control the outcome so you become anxious and if things are not going in your favor, you may even feel worried or get a feeling of helplessness.
When you invest solely based on someone else’s advice and without some knowledge of the investing process; you will experience the same kind of anxiety, worry, and helplessness. This eventually leads to making mistakes and bearing losses.
On the other hand, when you are clear about your investment process you can take control. You can decide how much to invest when to buy, what level of returns are acceptable to you, and when to churn the portfolio to get rid of underperforming stocks.
Fear Doesn’t prevent you from buying and Panic Doesn’t Cause You To Sell
While greed and FOMO can cause you to buy what you shouldn’t, panic or fear of losing can cause you to disinvest when you shouldn’t. In case of a bet, you can call ‘all bets are off ‘ as soon as the situation changes; you can’t do that with stock investing.
Market ups and downs are actually great opportunities for wealth creation, but not through speculation, rather based on a cold analysis of the company’s performance and the stock’s worth. Knowing what a stock is worth enables you to avail opportunities when good stocks are available at attractive prices. The prices may be down because there is fear all around or specific to the stock. But when you know the true worth of stock, this fear won’t affect you and prevent you from selling an otherwise good stock from your portfolio just because the price has fallen.
By basing your buy and sell calls on thorough research and evaluation of the stock’s worth, you can avoid giving into panic and being part of the herd at the wrong time.
You Stop Being A Bull or A Bear – You Become An Intelligent Investor
Even though the stock market is often labeled as ‘Bearish’ or ‘Bullish’ based on investor sentiment and activity, only those with intelligence, head-on-their-shoulders manage to survive its ups and downs and even benefit from it. You may hit the jackpot with some early successful investments and receive handsome returns, but for successful long-term investing, you need to develop a meticulous investment approach.
And that can’t happen if you tend to behave like a bull or a bear and keep changing the tune according to the times!
You need to find a rational approach towards investing, follow it with discipline, learn from it and learn how to make it work for you. It can take time, effort, and a conscious decision to keep on learning and stay on track; but such informed investing can deliver sustainable results over a period of time.
In sum, to start on your investment journey you need a robust process, with research, and analysis. While choosing the right stocks for your portfolio, you must commit to yourself that every single investment move has to be an informed decision. There must be scope for error but no scope for ignorance and blind betting.
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