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Behavioural Quirks and Discipline

The awesome Devangshu Datta writes about Behavioural Quirks:

Very few investors have the self-awareness required to analyse their own performances as objectively. Even fewer possess the self-discipline to change bad methods. Yet, it often doesn’t take much in terms of time or trouble. All it really takes is the humility to admit that not all losses are due to ill-fortune.

Before entering into investing, an individual needs to ask himself a few questions. One is, how much is he prepared to lose? A second is, what is the minimum return he wants? The third is, how long is he prepared to wait for those returns? If the answers are honest and realistic, he has a template for investing methods. He knows his risk:return profile.

The idea is to have a little discipline. But like common sense, it’s hard to find!

(Disclosure: DD is a dear friend, but he’s awesome anyhow)

  • Prashanth says:

    Profound questions w/o answers? My thoughts:
    1. While risk exists in every form of investing, its much different in the markets since a loss can over time turn out to be a gain & vice versa. By mentally limiting what his loss is (personal choice), a investor will actually come to believe that this is all about gambling and not investing.
    2. Why should one target some minimum returns. This is no bank deposit that if I stay for X number of days / months / years, I am assured of that gain. Also this flies into the face of Cutting losses early and letting Winners ride.
    3. And this is the most illogical of the above, does waiting long make a loosing investment come good? Investments suffering huge drawdowns rarely get back to even breakeven forget becoming a positive investment.
    The biggest issue with retail investors is that they come without a plan or a strategy. They buy and sell based on intitution and gut rather than a back-tested strategy and none have any idea of exiting at a loss using Stop Loss – especially stocks bought as a Investment against stock bought for intra-day (which too become investments if intra-day fails).

    • THanks Prashanth! Good Q’s and while there are no universal answers, my thoughts:
      1) Loss limits are important for what I call “closure”. You have to decide a point at which you simply cannot take more pain. To some people that goes as much as 50% loss (say per trade). For others it might be 10%. I am around the 30% range – anything beyond 30% makes me really uncomfortable. I think it’s important to recognize one’s own loss limit – or like people call it “gut lining” 🙂
      2) Minimum returns are simply to say that boss, this investing thing is working for me. I mean to a number of people it’s not really worth the effort to manually pick stocks or to analyse returns if they can’t beat the index or the best fund managers. I would think that beating the market by at least 2% a year is important. For others it may be an annualized 12%.The point is to state it, I guess.
      3) I think what DD is trying to say is that a passive strategy may need time which many investors don’t give it. He’s abig big proponent of the Stop loss.
      You’re right – the lack of a proper plan leaves investors unsatisfied sometimes. And the intraday becoming “investment” is quite rampant too 🙂

  • Raja says:

    Very nice post from Devangshu. Does he have active blog ?
    Another thing… i came across this site http://www.indiabookstore.net/
    It compares and returns the best book prices from most online stores in India. I now realized that so many books are cheaper on sites other than flipkart, which i have been using for long time without looking for better price!

  • Ashish says:

    Thanks Deepak.
    Link seems to be broken. The correct one being
    http://www.valueresearchonline.com/story/h2_storyView.asp?str=18363
    However – the point raised is a genuine one. I guess we anyway aren’t very objective about the decisions we take – not just in markets but in general.
    And I think you had made a point in one of your earlier posts – relating the ‘churning’ to the ‘churning of guts’ rather than ‘churning of portfolio’.
    And indeed ‘Indiabookstore’ is a nice site to compare books cost and availability. Though I lack the ability to link this information to this topic.
    Ashish

  • bemoneyaware says:

    It’s like common sense and we all know how common it is!

  • bemoneyaware says:

    The tips are amazing. Can’t get simpler than this How many of the investors invest with the end in mind! In India we are penny wise and pound foolish. People don’t buy investment but are sold!