In an interview with ETMarkets.com, Jain, who has over 14 years of professional experience in wealth management, said: When it comes to investments, the focus radically shifts towards avoiding losses more than making gains. In the process, they lose out on chances that can augment their gains.
To be a successful stock market investor apart from knowing about the companies you pick or the trading strategy one thing which is not discussed much but is equally important is Behavioral Science. How can it help make someone a better investor?
There are a lot of points that always get discussed in media be it fundamentals or technical whenever someone thinks of investing in stocks or trading in markets.
But, equally important is behavioural science which is important and critical like your emotions, biases, and beliefs which play a big role.
There is a common saying ‘buy when everyone is fearful and sell when everyone is greedy’, but mostly the opposite happens. The main reason is your ability to control your emotions or biases.
If the stock is good fundamentally and the company is also doing well, but since markets are going down and there is selling pressure in the stock – most investors fail to hold on to their position and exit. This is very common when it comes to retail investors.
Mind Over Money: Rahul Jain explains how to turn stocks to multibaggers by learning the art of behaviour science
We spoke to Rahul Jain – President & Head, Personal Wealth at Edelweiss Wealth Management who has over 14 years of professional experience in wealth management as well as equity capital markets to decode bahaviour science for long term investors and traders.
What is a confirmation bias? And, do you think this overclouds thinking?
Interpreting things in a manner that is consistent with our existing beliefs is called confirmation bias.
We generally tend to ignore negative news about something or give more credence to some positive news. Our ability to spot positive news more and ignore negative news is one of the things.
Because of confirmation bias, investors stick to loss-making investments because they believe they will do well.
When markets crashed in early March 2020, most investors felt that it would go down further and took the exit route. However, it was not the first time that the markets had witnessed such a crash. Even in the past, it went downhill only to reach new highs.
But several investors stuck to their belief that it wouldn’t happen and exited in a hurry to convert notional losses into actual ones. Things eventually turned and markets handsomely rewarded those who were patient. It is vital to dig deep, see the bigger picture and be logical to overcome this bias.
Another example where confirmation bias creeps is when it is time to rebalance our asset allocation. We do not sell at higher levels and buy at lower levels owing to confirmation bias.
When the market keeps going up, we keep justifying with information why it will continue to do so. The same happens when it starts moving down.
There is a common saying that when markets are going up investors become blind to the risk and when it is going down they become blind to opportunities.
Another important behaviour trait is loss aversion. You have spent decades of experience in dealing with investors’ behaviour. Any particular stories which you want to share?
When it comes to investments, the focus radically shifts towards avoiding losses than making gains. In the process, investors lose out on chances that can augment their gains.
In the long run, this can prove to be detrimental to wealth creation. While it’s prudent to adopt risk-mitigating strategies, it’s equally essential to look for opportunities to bolster gains.
A lot of people come back and tell me that I want to put all my money in a fixed deposit, and that might not be the best thing knowing the risk.
Taking action is important but moving to other extreme is also not very good.
Also, due to this bias, investors continue with loss-making investments because they want to avoid the pain of making a loss. However, it drags overall returns and proves to be a roadblock to achieving financial freedom.
Again a very common saying is that people lose more money in waiting for market corrections rather than in real-time corrections.
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)