How to avoid emotion-based investing with Nifty at 15,500?

At a recent virtual investor conference, an investor confessed that he had been scared to buy when Nifty was 14,500. At 15,500 Nifty, his heart was asking him to buy but his head was stopping him

Jun 02, 2021 05:06 IST India Infoline News Service

At a recent virtual investor conference, an investor confessed that he had been scared to buy when Nifty was 14,500. At 15,500 Nifty, his heart was asking him to buy but his head was stopping him. However, he was actually apprehensive that he would start buying stocks when Nifty reached 16,000, because of the fear of being left out.

What the investor has articulated is something most investors have faced. You end up waiting too long for a correction. When the correction does not happen, you are afraid of getting left out of the rally. In short, you get it wrong both ways. The reason; you are investing based on emotions and that is risky when markets are at all-time highs. So, what is the answer to this question?

Here are some simple ways to avoid emotion-based investing

a) Remember what John Templeton said, “The four most dangerous words in investment strategy are; this time it’s different”. Like it or not, history tends to repeat itself. When valuations get too steep, markets invariably correct and then they become too cheap, markets do bounce. So, if you missed out Nifty at 14,500, you don’t have to bet your bottom dollar on the stock markets at 15,500. You can always buy, but do it selectively and in phases.

b) Don’t give too much importance to short-term price movements or price ticks as we call it. Markets can be irrational longer than you like, but in the last 30 years Indian stock prices eventually move towards what the company is actually worth. To quote Buffett, “There is a business behind every stock, so focus more on the business and less on stock prices”. That is easier said than done, but is the only way out.

c) Things change in the market and so do fortunes. Forget about the multi-bagger you missed out and focus on the multi-baggers right in front of you. Look at what specialty chemical companies have done in the last 3-5 years. That has been a huge story of value irrespective of whether the Nifty has been up, down or flat.

d) In investing, you can never be 100% sure. In fact, there is nothing like sure-shot. Good investors will focus on a stock that looks 70% good and does not have too many red flags. Once you are substantially convinced, go with your gut. It normally turns out to be right, which a good deal of homework has been done.

e) Seek advice but don’t get carried away by the glamour of experts. Every analyst and every fund manager is as good or as bad as their recent performance. The whole concept of market advice is to help refine your investment decision. Only you know what is best for you, so take investment decision only after applying  your mind fully. Experts must be consulted but ensure to use your own discretion before any trade.

f) In the traditional Indian epics, King Dasharatha promises in a moment of extreme happiness. In a moment of extreme anger, Karna decides not to fight the war till Bhishma is alive. Both decisions prove to be turning points. That broadly applies to investing too, especially when investing in a market that is trading at high levels. The rule is to never make investment decisions when excited or frustrated. Remember, that when you are excited or frustrated you are not in a normal frame of mind. Investment decisions made under such conditions are never going to work for you. Leave out your emotions and if are in an emotionally disturbed state then avoid making serious investment decisions. Just put it off to another day.

g) When the index is at dizzy heights, dividend yield as a theme always works for you. In the last few years, Indian companies have become a lot more liberal with dividends. It is actually quite interesting that even at these levels of the market, there are enough stocks that you can find in the market with quality business models and paying above 4% dividend yield. This is the type of stories to chase in these markets.

h) Finally, keep your asset allocation in perspective. This is the last but not the least important aspects of keeping emotions out of investing. Your allocation to equities always has a perspective which is defined by your asset allocation. If your financial plan calls upon you to allocate 50% to equities and if your equity allocation has gone up to 65% due to the bull market, just follow your allocation discipline and dilute equity holdings. This will automatically ensure that you book profits at higher levels and reallocate to equities at lower levels.

You can, perhaps, remonstrate that the above points could apply to markets at all times. That is true; just that it becomes a lot more relevant and imperative with Nifty at 15,500.

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