Importance Of Investor Behaviour In Investing

Sarthak Doshi

Vice President, Indo Thai Securities Ltd. 

Grace M, born in small town in the United States, was an orphan, didn’t go to college, and worked her whole life as secretary. She didn’t get married, didn’t have any children and had a hard life. When she died at the age of 100, everyone who knew her was astonished to know that she left USD 6 million to charity. She hadn’t won lottery or inheritance, but she saved as much as she could, invested it prudently and left it for 80 years. On the other hand, there was a guy named S Gaurav. He was born in the richest family, got the best education, did his MBA from the best university of the world.

Post that he joined his family business and invested rapidly in new businesses. He became one of the most important persons in India. Few months after Grace died he filed for bankruptcy because of a crisis. He said his net worth was zero and he was not capable of repaying his debts. These contrasting stories prove that a person with almost no knowledge, skill or experience can also vastly outperform a person with the best knowledge, skill and experience. This can happen only in investing. We cannot expect this in other fields like surgery or engineering. It is because investment is not what you know but how you behave.

The Bigger Picture

In the last 17 years, Nifty has generated an annualised return of more than 15%, excluding dividends. But if we see this journey in detail, we would see chaos. In almost nine out of 20 years the returns have been flat to negative 50%. More than half of the companies in the index lost value or went out of business. Only 12 stocks have survived to remain in the index during these years. Yet, the index managed to give returns and most of it came from only 20% of the companies. By its nature, the stock market gives return in small bunches but when we get into too much detail, we often focus on the loss and chaos rather than the development or growth.

Keep it Simple

We often see that investment firms have people collecting lots of data, analysing results and news and adjusting their portfolio regularly. In stark comparison, the office of Warren Buffet famously doesn’t have any computer, TV, analysts’ reports or data. He only reads books and if he finds anything very complex, he puts it in a bin which reads ‘too hard’. And yet, Buffet is the richest investor in the world. It looks easy but when it comes to us, who would we rather give our money to manage – someone sitting on his chair and reading books or someone talking to you about the economy, sectors and which companies have good news and bad news?

We investors often discount simple things and give extra attention to complexities in an attempt to outperform. To succeed in investing, we don’t need to always take the best steps and be ahead of the crowd. It leads us into a very famous behaviour trait depicted by Carl Richards, which is greed and buy at highs, fear and sell at lows, repeat until broke. It is more important to be consistent, simple and avoid too many mistakes.

Avoid Market Timing

The total returns from an equity market is always = dividend + earnings growth + change in PE ratio. Change in PE ratio is nothing but the change in sentiments of investors. To predict the market movement, we can still predict the dividends and earnings growth with decent amount of certainty but it is almost impossible to predict the sentiment or mood of investors. Can someone really predict how the collective mood of investors will be the next year or the next month or even the next day? Sentiments become predictable only when the period of prediction becomes longer.

A lot of people feel the need to time the market and then shuffle their investments regularly. What we need to accept is that it is tough to predict movements in shorter terms and compounding takes years to happen. When we invest to generate returns over a long term, we should not review our results in the short term. The purpose of investment is to maximise return and not minimise boredom. More often than not it is our behaviour which hampers our returns. We need an advisor just not to tell us where to invest but also to keep our behaviour in check. 

The writer is a Vice President, Indo Thai Securities Ltd. Email id : sarthakdoshi@indothai.co.in Website : www.indothai.co.in