Thursday, June 16, 2011

Infrequent bets Big bets

I am fascinated observing research houses publishing regular reports on what stocks to buy. There are equity houses who also publish weekly and daily tips. Then there are what they call picks of the day, of month and year. There is no dearth of information on what stocks to buy. Some are subscription services and many are freely distributed. If you are a subscriber of a equity research, and they publish a recommendation once a week, you will have 52 in a year. Is it possible for an individual investor to track that many companies ? How does one go about investing in them? The jury is out. But I guess 8 to 10 can be handled. I mean you can really study and track businesses of a maximum of a handful of companies. Research and broking companies provide recommendations tempting us trade more frequently while maximizing their commissions.

Justify Full
You are better off doing your own research and tracking companies yourself. There are two aspects to this business of investing. The business perspective which is tracking the financial and growth parameters of a company. The other is tracking just the share prices and not be bothered about fundamentals. The second is like spending an evening in a casino. There is no certainty how bottom you can go. By playing the casino like stock market, you are are succumbing to the emotional aspects and there is no application of analysis or logic. There is a lot of research that is going into how the brain responds to stock tickers, buys, sell, profits and loss. How many get stuck into the stock market muck and finally end up doomed. The report peddling firms exploit this emotional side of the brain. The human brain is wired in a certain manner that while logic tells you to buy low and sell high, you will end up doing just the opposite. This is very natural, blame it on the chemistry and circuitry of the brains. Speculators and traders revel in expectation of making money. Expecting financial gains and actually getting them are experienced by human brains very differently. There is more intense feelings while expecting and less intense while u actually get it. The markets also move up in expectation of some event. But upon realization of the event, it may not move up, instead it would correct. Like Infosys goes up by 15% in a week on expectation of huge growth momentum. But when they announce they have actually grown their profits by say 18%, the stock comes down or may move sideways. This is a classical example of this theory of neuro economics - Jason Zweig explains this in his book which combines research of neuroscience, economics and psychology. He helps us understand what drives investing behavior not only on the theoretical or practical level, but as a basic biological function. I would recommend this book to every investor.

Far removed from all this fury and tornado let off in the brains by speculative expectations, investing is a a boring, slow undramatic experience devoid of any flamboyance. When an Octogenarian veteran investor was asked what was his best lesson over several decades of his investing career, he replied 'patience'. That sums up many a man years of collective learning. Patience is not about waiting endlessly hoping target prices are achieved. Patience is about waiting for an opportunity. Its about waiting for right valuations. Patience is waiting for your great company to make a mistake. And to allow the casino like market to beat down the prices. As we saw very recently how a media company was hammered close to 52 Week lows when news broke that their MD is likely to be probed by CBI in 2G scam. Imagine what would happen if he was really probed and then arrested. Or when AP government went balastic on Micro-finance firms trying to curb them and the markets hammered those stocks. As a legendary investor said, Few Bets & Big Bets.

Happy Investing!

1 comment:

Rahul Paliwal said...

Nice Article Naresh. You mentioned correctly about behavioral finance researches which are going on.

Quite contrary to other businesses ,Investing is dull and boring activity. As legends mentioned we must learn "Catch Right, Sit Tight". Problem arise when one mixes his trading and investing goals. These are 2 quite different animals and requires different set of skills.
One also need to look into his/her circle of competence.

So Keep sharing nice thoughts dear.