Wednesday, September 29, 2010
Study Yourself before...
Investment success or failure depends on your ability to formulate a successful investment strategy and to have the discipline to follow the chosen investment strategy. Understanding one’s own personality traits is essential, both for formulating a successful investment
strategy and in implementing the strategy with discipline. For example: if you are prone to take impulsive decisions, you could end up buying stocks on tips without doing detailed research in stocks where you are investing, whereas if you have an aggressive personality, you might be trading/investing in stocks with high risk-reward ratio.
New investors should make prudent stock investments in the beginning by investing small amount of capital until they gain confidence on their investment strategy. While investing, they should also gain clarity about how their personality traits could affect the successful outcome. Although the investors might not gain during the initial learning period, they can successfully deploy their experience while managing a bigger pool of funds.
If you are an existing investor, the best way to learn and improve the success in investing would be to study whether you are taking buying/selling decisions based on the emotions or based on a sound investment strategy and review the performance of your past investment decisions.
Before you evaluate your performance you need to gather data about your past transactions. Thereafter, you should be reviewing your reasons for purchase and/or sale of your investments.
Check whether the reason to buy a stock was based on some rumour/hot tip from your friends or based on information about the expected stock price movements? Have you bought any stock because it seems to be moving a lot off late and you expect it to continue to rally after you have purchased it?
Did you buy some stock because all your friends and most of the investing crowd seem to be buying it and you do not want to feel left out?
Have you bought a stock because you had a gut feeling that it would go up and you did not want to miss the upside opportunity?
In most of the cases above, 'greed' was the predominant emotion that has dictated the purchases by the investors.
Check whether you have sold the stock, after it witnessed a steep fall and you were afraid that it would continue to fall?
Have you sold your investments because other investors were also exiting and there is panic in the market place?
Have you sold because you had notional losses and were afraid that there could be some negative developments in the company and the stock would fall further?
In most of the cases above, 'fear' was the predominant emotion that has dictated the sales by the investors.
Investors also need to review their current holdings periodically to check whether they are holding stocks as a part of their investment strategy or due to decisions based on the emotions such as hope, love, disbelief.
If the stock you have bought witnessed a steep fall, are you still hoping that the stock would recover to reach your cost price where you bought, so that you can recover your amount?
Are you in love with some of the stocks that you hold, and as a result you do not want to sell those stocks even though the performance of the stock is poor?
Are you still holding the stocks that you have bought at higher prices in an up trend because there is disbelief that the market has turned around and entered a downtrend?
If your answer to the above questions is yes, then you might not be holding
stocks that give you the best upside opportunities in a recovery.
Pls. note that investors whose decisions were dictated by the emotions such as Greed, Fear, disbelief and love are the ones who are not able to establish a proportionate balance between risk and reward. Once they understand their personality traits they can remove the distortion caused by their emotions and they would be able to take a more disciplined approach towards investing.
By reviewing the past experiences in the market and learning from them, investors can improve their success rate in stock market investing. Based on their learning, investors can redefine their investment strategy and apply it successfully to invest in Stocks, Commodities and Real Estate markets!
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