HOW YOU TAKE UR INVESTMENT DECISION ???

Should you be emotional or logical in taking investment decisions? That is an easy question. Every one is, or should be, logical in their investing decisions, right? Wrong! Even seasoned investors with 20 years experience in the stock market make silly mistakes by letting their ‘gut feel’ overrule their own logic.

This is what makes making big money in the stock market such a challenge. How can you overcome the mental impulses that lead to poor decision making? It takes patience, discipline and several years of effort to reach a stage where one can be dispassionate enough to buy or sell a stock purely on the basis of logic, and not get swayed by what is happening in the market or in the country or in the world.

One way to approach the problem is to have a plan. First a financial plan where you set out short-term and long-term goals for achieving different commitments such as buying a car, an apartment, children’s education, etc. The financial plan will lead to an Asset Allocation Plan, where a certain percentage of your portfolio gets allocated to different asset classes, like stocks, fixed income, real estate, gold.

Of course, you should not take my word for it. Assess if you have a problem at all – the ‘problem’ being emotional decision making while investing. So here is a little and apparently easy test that you can undergo to determine if you think emotionally or logically.

Shane Frederick of MIT’s Sloan School of Management introduced a three-question Cognitive Reflection test in his paper ‘Cognitive Reflection and Decision Making’. The three questions – modified for an Indian readership – are:

1. A bat and a ball costs Rs 110 in total. The bat costs Rs 100 more than the ball. How much does the ball cost?  Answer: Rs ……..
2. If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets?  Answer: ……….minutes
3. In a poultry, eggs are being collected in baskets. The number of eggs in a basket doubles every minute. If a basket gets filled in 48 minutes, how long will it take to fill half the basket? Answer: ……..minutes

Please take a sheet of paper and a pencil and do not take more than 30 seconds to answer all three questions. Then take a minute or two to reflect on your answers. Did you get the answers right the first time? Did you get the correct answers after thinking about the questions a bit more?

Don’t feel bad if you didn’t get correct answers the first time. After testing several thousand people, Frederick found that less than 20% got all three answers right. Among professional fund managers, traders and analysts less than half managed to answer all three questions correctly!

Frederick also found that those who do well on the cognitive reflection test tend to be more patient in decisions between smaller sooner rewards and larger later rewards.

(Note: You don’t have to send me the answers. This is supposed to be a self-assessment test. But your comments are most welcome.)

SOURCES : EMAIL

WHY LONG-TERM INVESTORS SHOULD LOOK AT THE BIG PICTURE ?

With the Sensex and Nifty indices stuck within trading ranges for more than a month, small investors are in a quandary. What to do next? Two days of sharp bounce from a bottom, and the urge to jump in and buy is almost uncontrollable. Three days of correction from a resistance level, and every one is worried about a 2008-like crash.

Getting worried and disturbed about short-term index gyrations only increases your blood pressure and clouds your decision making. Times like these are true tests of your investment mettle. In life, unplanned action is some times better than planned inaction. But, for building wealth through successful investing in the stock market, you should practice the discipline of planned inaction.

The inaction refers only to buying and selling of stocks. Reading annual reports, books and preparing buy/sell lists are part of the daily ritual of  long-term investors. What then is the big picture referred to in the headline? I’m not an economist, but here is my take on what is happening around us.

Thanks to the Internet and FIIs, our stock market is fully integrated with global markets. All the nonsense about decoupling because of our strong domestic market is just that – nonsense. So, keep an eye on what is happening in global markets. To keep readers updated, I regularly post about stock indices in the US, Europe and Asia. If you are not reading those posts, ask yourself: Why not?

Europe is in quite a mess due to a unified currency that is not helping profligate nations - like Greece, Italy, Spain, Portugal - that are deep in debt and have very little capabilities (or even intentions) of repaying that debt. They neither can print their own currencies, nor can they devalue their currencies. The only options are that a financially stronger economy like Germany, and perhaps the IMF, will bail them out to stop them from defaulting. But that is postponing the problem – not solving it.

Many Indian companies – particularly IT services companies – switched their export focus from the USA to Europe post the dot.com crash in 2001. Some have built up significant businesses in Europe, including acquisition of European companies. The economic mess in the Eurozone is going to affect their bottom lines for the next few years.

China is a wild card. For years, they have been far ahead of India in building world-class infrastructure and an export-led high-growth economy. But with global economies slowing down, China is desperately trying to re-focus on their domestic market. There is strong suspicion about their reported growth figures, and that is reflected in their sliding stock market. If they start cutting back on their commodity purchases, which has been sustaining the global commodities market and shipping businesses, a big crash in global stock markets may follow.

The USA is not on the verge of collapse – like they were three years back. The situation is grim, but not hopeless. There will be a lot of pain before their economy eventually turns around. But thanks to two rounds of quantitative easing, and significant belt-tightening, US corporations are sitting on a lot of cash. They haven’t curtailed spending on existing IT services, and there are signs that they may be spending more on new services. The strengthening dollar will add to the bottom lines of IT services and export companies.

Our over-dependence on oil imports will further add to our balance of payments problem. The government had introduced several populist measures to help the rural poor. Subsidies on diesel, kerosene, fertilisers have added to the fiscal deficit. Rampant corruption and scams, as well as high inflation are keeping FIIs away. Their inflows partly help in reducing the deficit.

However, our GDP continues to grow. Not at 8-9% but more like 6-7%, which is much better than almost every one else except China. That pretty much rules out a 2008-like crash in the Indian stock market. But it could take a while before we see new highs on the Sensex and Nifty.

The sensible approach will be to cut out the daily noise emanating from the business TV channels, and concentrate on companies that have capable and trustworthy managements, and have records of several years of good performances through bull and bear cycles. If they produce goods or services that find buyers regardless of the state of the economy, so much the better. Companies that sell toothpaste, cigarettes, soaps and detergents, biscuits, life-saving drugs, drugs for chronic diseases, tractors, power tillers, tea and coffee will continue to do well.

Just remember that the stocks that don’t fall much during a down trend, don’t rise much during the subsequent up trend. The ones that fall more, tend to rise more. Of course, this ‘rule’ works only for well-managed companies.

SOURCES : EMAIL

SECRETS OF SELF-MADE MILLIONAIRES REVEALED

Habit #1: They create their own destiny.

They never blame, justify and criticize like most people. They know that when they blame and criticize, they will become a victim.

Habit #2: Rich people play money game to WIN but most people play money game NOT TO LOSE.

What is the difference between these two? Rich people play money game to WIN megabucks where as most people play money game just to get enough money for themselves.

Habit #3: Rich people are 100% committed to be rich.

Let me ask you one question...Do you want to be rich? You might say 
'Of course I want to be rich, I wouldn't invest in this opportunity if I don't want to be rich' . Most people only WISH to be rich and they don't mind not being rich. Rich people have a strong desire to be rich and successful. They know that becoming rich is their top priority and they just cannot accept not being rich.

Habit #4: Delayed gratification

What keeps most people rich is the habit of wanting instant gratification. Instant gratification is the habit of always wanting to enjoy now and not having the patience to wait for future benefits. As a result this people spend a lot more than they invest. When it comes to investing in books and seminars etc they will always think twice as they have to wait for future benefits.

Habit #5: Rich people think BIG.

They set challenging goals for themselves and take massive action.

Habit #6: Rich people focus on opportunity

Opportunity always comes with obstacles. It's like a package; you cannot just take opportunity and 'throw' the obstacles.

When there are challenges and obstacles, most people will focus on them and then give excuses like 'I'm too young', 'I don't have enough money' and eventually got them into believing that they are doom to be poor forever. Rich people focus on opportunity instead of obstacles.

Habit #7: Rich people respect and love money

As many of us grow up, we may unknowingly pick up many limiting beliefs and painful associations towards money from our family, friends, teachers etc. If you come from a poor or a middle class family, you might be taught that 'money does not grow on trees', 'investing is risky', 'money will change you', 'save money for rainy days' etc etc.

As a result, your subconscious mind associates so much fear and negative feelings towards money that it will stop you from becoming rich. Your inner mind won't allow you to become rich as it would give you more 'problems' or make you a bad person'.

However, you must understand that your parents and teachers taught you that because they taught they were passing a good advice. Very often they negative associations towards money and that is why they choose to pass this advice to younger generations.

Habit #8: Always do more than expected

Rich people are value creators. Value creators have the habit to do a lot more than what is expected. If they are paid $3,000, they will work as if they are being paid $10,000. If they are expected to generate $20,000 worth of profits, they will create $50,000 worth of value! Theses people are the one who get promoted super fast and get their income doubling or tripling every year.

The habit does not only apply on employees, it applies to anyone from super stars to entrepreneur.

When Michael Jordan was interviewed and asked how he became the world's greatest basketball player, he replied,

'I expect more from myself than anyone would ever expect from me! When my coach expects me to train 3 times per week, I would train 5 times. When my coach expects me to score 15 points for each game, I would score 36 points! That is why I'm the best in the world'.

Habit #9: Rich people are willing to promote themselves and their values

Habit #10: Rich people are BIGGER than their problems

When problem comes many people will be discourage and let the problem happens without resolving it. Rich people will try to solve their problems.

Habit #11: Rich people get paid based on results

They chose not to get rich by time. Rich people know that the wost possible way to be financially independent is to sell your time. They choose to make money based on performance and results

Habit #12: Rich people think BOTH

Most people think that if you want to earn lots of money, you'll have to sacrifice other stuff. Rich people believe that you can earn megabucks without sacrificing anything.

Habit #13: Rich people focus on their net worth

People with big cars or house are not necessarily rich. They may have lots of loans and debts.

Habit #14: Rich people manage their money well

They take calculated risk before investing their money. Most people spend most of their money on luxury things after their paycheck. But rich people their money and in opportunities that help their money grow.

Habit #15: Most people quit because of fear, doubt and worry

Rich people act in spite of FEAR, doubt and worry.

Habit #16: Rich people constantly learn and grow

Rich people are willing to learn from other people without looking at others' education, age etc.

Habit #17: Rich people have their money work hard for them

Rich people knows how to look for an opportunity, invest it and then see their money 'growing'. But most people work hard for money. They sacrifice their time for more money.

LEARNING EFFECTIVE MONEY MANAGEMENT

Increasing wealth and net worth is about more then just making good investments or even "getting lucky". The key to lasting wealth comes from good money management. Do you realize just how many people are millionaires? The numbers may surprise you. The person sitting next to you could very well be a millionaire. Your neighbor that lives across the street could also be a millionaire.

The most common misconception that most people have about the wealthy is that they always drive around in fast and fancy cars, take lavish vacations, and live on large estates. While that may be true of some people, but the majority of the wealthy live normal lives and go to normal jobs. The reason? They realize that uncontrolled spending can lead to uncontrollable credit and unfortunately as has been the trend, bankruptcy. There are several points that one could use to compare their wealth plan with their actions to see if they are truly heading in the right financial direction.

Do You Save? Sure everyone tries to save a little here and there, but to truly become a financial success a regular savings plan that is part of a well-balance budget. Saving money isn't always easy. The advice of a financial advisor or even the use of money management software can help you plot a financial route. Planning for emergencies, educations and even mundane expenses should be part of a budget.

Certainly there are people who have stumbled upon their fortunes either by inheriting it hitting it big in the stock markets. That is a very rare occurrence and those who frivolously invest in every scheme imaginable to strike it rich usually just end up the complete opposite. Again proper money management is key.

Planning to save means that you determine now where you want to be and then follow in a patter of saving and investing that makes it possible to meet that goal. Of course a balanced portfolio utilizes more then just a savings plan. Investing in mutual funds and stocks should really carry and equal share of the load. Good money management also means controlled spending. A perfect example is that of an NFL player.

It is hard to believe that people who make enough in a couple of years for most of us to retire on would have any kind of money problems, but year after year players get themselves into financial binds and end up in the red. The reason is poor spending habits. Spending money on anything from a sports car and matching house for mom to an expensive dog house, they forget how important it is to save thinking they will always have enough. That is almost never the case. For these stars they should be saving more then they are spending in a year to be prepared for premature retirement or other emergencies. Only by controlling spending habits and developing solid money management skills can a person, star or not, ensure that they will be financially secure for the future.

By: Mikahamilton

INTELLIGENCE AND TRADING

There is no correlation between intelligence and trading. 

Many people assume that those who regularly make money in stock markets must be very clever. Or that you must be blessed with some intelligence to "make it big" in the markets.

This is a very wrong assumption as there is no correlation between intelligence and trading.

If clever or intelligent traders were good traders, then all your classmates from school or college who were toppers or other clever people (like doctors, engineers etc) you meet in life would be excellent traders. That is certainly not the case.

On the other hand, a lot of ordinary people have earned excellent returns by simply buying a stock and not doing anything for years or decades (Warren Buffet). While people with far shorter timeframes and wanting to "do something everyday" have lost a lot several times over.

In both cases, the returns or losses have nothing to do with the intelligence or lack of it. It is more a case of "cut your losses fast and let profits runs". In case of long term investors, provided you have invested in a good stock (no intelligence required -common sense is enough) and have held on to something for years (not difficult), prices invariably catch up and you will be in profit. For traders, it becomes "follow the trend", respect stoplosses and hold winners. Again no intelligence required.

Another example is of star traders in brokerage houses or in hedge funds. They all go through their ups and downs. When they are at the peaks, they are the toast of the media and articles are written about how they succeeded. It is when they go through severe drawdowns you realize that their previous winning streaks were just random events and they were at the right place and the right time and they traded in the direction of the trend. We tend to call this intelligence but if they were really clever, they should not have been affected by trend reversals but they too lose fortunes or fail to capitalise on the reverse trend.

Let's put this the other way round. If I buy a stock and then the stock gives a 200% or 300% return in 6 months, does it mean that I am a genius? Obviously not. And if the stock loses 50% in 6 months, does it mean I am a fool? No again. These are random events!

I am fool IF I cannot exit a loss making position OR I cannot ride a profit making trade as long as possible. And yes, I have been foolish several times in my life though less often now than before. So sharing this experience becomes important so that others can benefit from this.

Now it has taken me years to understand this which now obviously looks very obvious. But for most people, it is not easy taking a loss and there is a strong tendency to "book profits" whenever this happens. This approach will never help you earn big money. Your broker will always earn.

A TRADER

A trader is usually an “opportunistic ” person who believes in inefficient market theories. He believes that markets are driven by human emotions like greed/fear and due to demand / Supply. No stock is fairly priced at any point of time. He tries to take advantage of these mispricing and profit's from the excessive “greed” and “fear”.


A trader always uses “probability”. He never uses words like “should” or “will”. He know's that no one can predict the markets and he never even tries. Like the markets “will” do this or the markets “should” do that. It is always, something “may” happen or “may not”. He is always optimistic that a trade might work out but turns into a “realist” when it doesn’t. He changes his opinion as many times as the market changes its direction. That’s how he always manages his risk and believes in cutting his losses. Traders take ‘directional” bets and also use some “leverage” to enhance their returns. Traders also use “market timing” techniques to get an edge in the market. A trader can choose to trade a “single market” or “multiple markets” like stocks, commodities, currencies, etc. Trading multiple markets helps him reduces his risk.


Usually when we hear the word “trader” we start thinking of “short term traders or intra day traders” who buy and sell 50 times in a day.Contrary, Swing trading last for 5-7 days, Position trading last for a month and long term trading often last for 3- 12 months. So difference between a “trader’ and an “investor” is not the time frame but rather the difference in their thinking, approach and attitudes.

A BRILLIANT INTERVIEW

Don't miss last 2 Questions...

 
Some, rather most organizations reject his CV today because he has changed jobs frequently (10 in 14 years). My friend, the ˜job hopper™ (referred here as Mr. JH), does not mind it. well he does not need to mind it at all. Having worked full-time with 10 employer companies in just 14 years gives Mr. JH the relaxing edge that most of the ˜company loyal™ employees are struggling for today. Today, Mr. JH too is laid off like some other 14-15 year experienced guys “ the difference being the latter have just worked in 2-3 organizations in the same number of years. Here are the excerpts of an interview with Mr. JH:

 
Q: Why have you changed 10 jobs in 14 years? 

A: To get financially sound and stable before getting laid off the second time.

 
Q: So you knew you would be laid off in the year 2009? 

A: Well I was laid off first in the year 2002 due to the first global economic slowdown. I had not got a full-time job before January 2003 when the economy started looking up; so I had struggled for almost a year without job and with compromises.

 
Q: Which number of job was that? 

A: That was my third job.

 
Q: So from Jan 2003 to Jan 2009, in 6 years, you have changed 8 jobs to make the count as 10 jobs in 14 years? 

A: I had no other option. In my first 8 years of professional life, I had worked only for 2 organizations thinking that jobs are deserved after lot of hard work and one should stay with an employer company to justify the saying ˜employer loyalty™. But I was an idiot.

 
Q: Why do you say so? 

A: My salary in the first 8 years went up only marginally. I could not save enough and also, I had thought that I had a ˜permanent™ job, so I need not worry about ˜what will I do if I lose my job™. I could never imagine losing a job because of economic slowdown and not because of my performance. That was January 2002.

 
Q: Can you brief on what happened between January 2003 and 2009. 

A: Well, I had learnt my lessons of being ˜company loyal™ and not ˜money earning and saving loyal™. But then you can save enough only when you earn enough. So I shifted my loyalty towards money making and saving “ I changed 8 jobs in 6 years assuring all my interviewers about my stability.

 
Q: So you lied to your interviewers; you had already planned to change the job for which you were being interviewed on a particular day? 

A: Yes, you can change jobs only when the market is up and companies are hiring. You tell me “ can I get a job now because of the slowdown? No. So one should change jobs for higher salaries only when the market is up because that is the only time when companies hire and can afford the expected salaries.

 
Q: What have you gained by doing such things? 

A: That's the question I was waiting for. In Jan 2003, I had a fixed salary (without variables) of say Rs. X p.a. In January 2009, my salary was 8X. So assuming my salary was Rs.3 lakh p.a. in Jan 2003, my last drawn salary in Jan 2009 was Rs.24 lakh p.a. (without variable). I never bothered about variable as I had no intention to stay for 1 year and go through the appraisal process to wait for the company to give me a hike.

 
Q: So you decided on your own hike? 

A: Yes, in 2003, I could see the slowdown coming again in future like it had happened in 2001-02. Though I was not sure by when the next slowdown would come, I was pretty sure I wanted a ˜debt-free™ life before being laid off again. So I planned my hike targets on a yearly basis without waiting for the year to complete.

 
Q: So are you debt-free now? 

A: Yes, I earned so much by virtue of job changes for money and spent so little that today I have a loan free 2 BR flat (1200 sq.. feet) plus a loan free big car without bothering about any EMIs. I am laid off too but I do not complain at all. If I have laid off companies for money, it is OK if a company lays me off because of lack of money.

 
Q: Who is complaining? 

A: All those guys who are not getting a job to pay their EMIs off are complaining. They had made fun of me saying I am a job hopper and do not have any company loyalty. Now I ask them what they gained by their company loyalty; they too are laid off like me and pass comments to me “ why will you bother about us, you are already debt-free. They were still in the bracket of 12-14 lakh p.a. when they were laid off.

 
Q: What is your advice to professionals? 

A: Like Narayan Murthy had said “ love your job and not your company because you never know when your company will stop loving you. In the same lines, love yourself and your family needs more than the company's needs. Companies can keep coming and going; family will always remain the same. Make money for yourself first and simultaneously make money for the company, not the other way around.

 
Q: What is your biggest pain point with companies? 

A: When a company does well, its CEO will address the entire company saying, ˜well done guys, it is YOUR company, keep up the hard work, I am with you. But when the slowdown happens and the company does not do so well, the same CEO will say, œIt is MY company and to save the company, I have to take tough decisions including asking people to go. So think about your financial stability first; when you get laid off, your kids will complain to you and not your boss.

7 PSYCHOLOGICAL HABITS

1. Overconfidence and optimism

Most of us are way too confident about our ability to foresee the future, and overwhelmingly too optimistic in our forecasts.

This finding holds across all disciplines, for both professionals and non-professionals, with the exceptions of weather forecasters and horse handicappers.

Lesson: Learn not to trust your gut.

2. Hindsight

We consistently exaggerate our prior beliefs about events.

Market forecasters spend a lot of time telling us why the market behaved the way it did. They’re great at telling us we need an umbrella after it starts raining as well, but it doesn’t improve our returns. We’re all useless at remembering what we used to believe.

Lesson: Keep a diary, revisit your thinking constantly.

3. Loss aversion

We hurt more when we sell at a loss than we feel happy when we sell for the same profit. But stocks don’t have memories – decisions on whether to buy or sell should always be independent of your buying price.

Lesson: Ignore buying prices when deciding whether to sell.

4. Regret

Investment decisions should overwhelmingly be about risk, and risk implies a judgement, which may turn out to be wrong, often through bad luck rather than bad thinking.

Becoming overly focused on past decisions that have gone wrong without analysing whether the decision made was rational under the circumstances isn’t rational. Investing involves making mistakes and is often down to luck.

Lesson: Learn to live with mistakes.

5. Anchoring

Ten years or so of research have shown we have a nasty tendency to ‘anchor’ on specific numbers. Psychologists can change the results of simple estimation questions (for example, how old do you think Woody Allen is?) simply by posing an earlier unrelated question containing a number.

Lesson: Don’t get fixated on specific numbers, such as buy prices, stop loss prices or index values.

6. Recency Bias

We pay more attention to short-term events than the longer-term. So the effect of a short-term downturn in a company’s fortunes may be exaggerated, or we may simply assume that current market conditions will persist forever.

Lesson: Buy some history books, and look beyond the short term.

7. Confirmation Bias

We just love other people to confirm our decisions. And other people just love us confirming their opinions. In fact we could just get together and have a regular love-in but it doesn’t make for good investing. The only money you lose is your own.

Lesson: Make your own decisions; don’t worry about what others think


SOURCES : ASR