2. “When others are greedy be fearful and when others are fearful
be greedy” – Ill timed bouts of greed and fear among investors make
stock markets volatile.
Rational & Successful investing is all about restraining ad channelizing
these emotions and understanding behavioural finance. And not
company behaviour , market sentiments and crowd behaviour.
In this complex environment ,BEHAVIORAL FINANCE comes as an
antidote to investor anxiety and a guide to sane and safe investment
3. 2 sources of returns from equity :
The fundamental element concerns the earnings behind the enterprise
along with the dividend paid out during the holding period.
The speculative element concerns the changes in the appraisal of the
current performance and prospective profitability by the market
participants. In order to calculate speculate element , following formula
may be applied
EPS at the end of the year x change in PE ratio
4. What is BEHAVIORAL FINANCE
Behavioral Finance is an emerging field that combines the understanding
of behavioral and cognitive psychology and financial decision making
This school of thought argues that markets are not efficient in short run
and people do not make rational decisions to make profits. People are
susceptible to numerous behavioural anomalies, which become counter
productive to the wealth-maximization principle leading to irrational
5. “Intelligence and Brilliance carries the day , but it is Wisdom that endures”
This wisdom is a product of various factors
1. Learning from mistakes and experiences.
2. Using common sense.
3. Wisdom from the literature of past successful investors like Benjamin
Graham, Peter Lynch , Warren Buffet to name a few.
4. Ability to control one’s emotion and understand the emotion of others.
5. Discipline and ability to stay in the course in spite of all the temptations.
6. HEURISTICS are the short cuts that brain takes when processing
Some valuation heuristics are
2. PRICE/BOOK VALUE
Though the best way to project a company is analysing its discounted
cash flows and ratio analysis, it becomes all together important to
consider other behavioural aspects in foray.
7. What an Investor demands ?
1. The dividend from the stock.
2. The capital appreciation of the stock.
However , both these sources of returns are dependent on the price
one pays when one acquires the stock. If one buys a stock in a bull
market when prices are high , then one takes a hit on the dividend yield
and capital appreciation would take much longer as the base price is
It is very important that the acquisition price is lower for one to have a
healthy stock return.
Hence , buying stocks without taking into consideration the value of
stock and the price one is paying for that value is a sure way to take a
hit on one’s long term returns.
8. What is Contrarian Investing ?
A contrarian investor can be defined as one who attempts to profit b betting
against conventional wisdom but only when the consensual opinion
appears to be wrong.
Difficulties in following Contrarian Investing
1. False Consensus Effect : It highlights a tendency common amongst
us to overestimate the percentage of people we think would agree with
2. Group Thinking : All will think alike, even if they don’t agree with
something and fear of reprimanded in the group they hide their true
3. Buyer’s Remorse : It is expressing remorse after committing our
capital to anything , which triggers out self doubt or a remorse like
feeling that I may have done something wrong.
9. 4. Myopic Loss aversion : Mr. Warren Buffet says , “ If you cannot stand 50%
paper loss on your stock , stay away from the markets.” People are more
concerned when they experience losses as compared to the satisfaction the
derive from a similar gain.
“Investing is most intelligent when it is most business like” – Benjamin
The basic idea to invest in a business is to calculate , how much we are
getting for our money’s worth as compared to other oppurtunities.
Following parameters would be very important for a company
Low Cost Producer
Eye on Earnings/Share
Level of Debt
10. Lessons for INVESTORS !!
1. Investors end up paying crazy valuations for stocks when they chase
stocks in current hot sectors.
2. When a sector is hot , new companies taking advantage of the market
conditions enter the market with IPOs to cash in on investor fancy.
3. Be wary of your favourite stock market TV show.
4. Rapid growth in a sector does not mean good investment returns for the
5. Sector Bubbles are a warning to investors to reduce their allocation to
SUCESSFUL INVESTING IS ALL ABOUT BUYING WHAT OTHERS ARE
SELLING AND SELLING WHAT OTHERS ARE BUYING