Investing Insights

Finding out the right financial security to invest in is necessary but adopting good disciplined investment behaviour and sticking to the plan resolutely is equally important. Every investor will have a different objective or goal but the same can be achieved with the right approach. 

Investors often tend to deviate from their plan, thereby creating a mismatch with their goals.

We chalk out six key investing insights:

- Prepare an Investment plan:Every investor should have a defined long term or short term investment plan according to their specific requirements of meeting their financial goals. They should automate their savings towards an investment plan to avoid any sort of manual interference. There are some investments that carry higher risk but have the potential to generate high inflation-adjusted returns than other asset classes in the long term, while some investments come with low-risk and subsequently lower returns. Ensure that you strike a balance between human capital left and investment capital goals. Once you are invested, your portfolio needs to be analysed timely.

- Behavioural biases: Investors should focus on those biases that are most likely to impact their investment decisions and those supported by robust evidence. An understanding of one’s own behaviour should be at the forefront of every decision that we make. Business conditions, financial institutions and regulations/ policies are ever changing, but human nature remains essentially the same. Fear, hope and greed affect the investment patterns in the long term.Traders fail when they allow “hope of recovery” to prevent them from cutting their losses and “fear of losing” makes them sell prematurely, thereby not participating in a further upside.  An investor should know and focus on the issues which affect their investment plans. Never make an emotional decision while investing. 

- Dissect the information and use it to your advantage: The first and most obvious source of informational edge is to identify things of value that others have not. Organize your data in a way that is useful and helpful to you. Paying attention to the right information can provide you with a distinct edge. There is much information available about a particular stock or fund but only a few of the data points are important, critical and relevant. There may be some information which will be useful but expiring soon, some information which is useful but permanent, some irrelevant to your needs but beneficial to others. So, choose information wisely. For example - financial economists examine how new information about an industry affected companies with a single business versus conglomerates with multiple businesses. So, information can be more complex than it looks prima facie.

-  Analyticals skills: As investors, we tend to assume that future performance will be a continuation of the recent trends. We feel positive about stock prices close to the market peak and are reticent to invest at the bottom. Our decisions are swayed by the most recent news headline, even when making long-term decisions. Everyone has access to the same information and analytical tools; the only difference comes from your ability to use them wisely. Those who can filter out the noise tend to make more money than others. For example, institutional investors generally beat individual investors over a longer time horizon, which means that individuals can be a good source of excess returns for institutions.

- Know your tails: We are more sensitive to losses than gains and overly influenced by short-term considerations. Most long term investors spend a bulk of their time in predicting the direction of the markets over the next few weeks or months. This, we believe, is a futile effort. Investors should focus their efforts on understanding the margin of safety in a trade and model the probabilities of permanent impairment of capital. For example, one investor’s ability to take risks for a near-term goal will be lower than another or the investment choice will be different. It is also important to differentiate the willingness to take risk from the ability to take risk.

- Keep reviewing the performance: We need to periodically monitor our portfolio and keep tracking the delta between our expectations and reality. If the portfolio is performing, then it’s prudent to stay invested in it for a longer time. But if you are not getting the desired results, then there is a priority to review and re-balance the portfolio. Sometimes, this may also involve re-visiting or resetting near term expectations.

The author is the chairman of Abans Group