Jan 4, 2013|
Lessons from Peter Lynch - II
In our previous article on Peter Lynch investment philosophy, we discussed how a common man can use his knowledge to make money in the markets and his edge over a fund manager. Continuing our series on Mr. Lynch, we will now discuss the right approach to invest in the markets.
As a beginner in the stock markets, one is likely to start straight with the stock screeners to select the stock that fulfils qualifying criteria. However, in doing so, a key step in investing that decides final outcome gets skipped. We are referring to an unbiased self assessment of investor's requirements, attitudes, psychology and emotions. Think about it. We are subjected to the same news, same market movements and recommendations. It's the same mathematics as well. However, even if two different investors start with the same portfolio, they are likely to end with different results. This is because markets tend to be volatile to which every individual will react differently. For e.g, while decline in the price of a stock may look like a perfect buying opportunity to one investor, it may trigger a panic button reaction from another and make him sell at a loss.
This is where behavioral aspect of finance comes into play which most of us hardly ever spend any time to analyze. Our investment choices should be based on our liquidity requirements, horizon period, and most importantly, the risk appetite. Hence, before doing a stock analysis, a self analysis of attitudes and objectives is must.
Talking about the attitudes and psychology, Mr. Lynch has something interesting to say about how it works in case of an average fund manager. For them, the self protection and survival instinct guides the stock selection process. A normal fund manager will not mind losing a small amount on a well known stock/company and is likely to forego the chance of making huge profits on a lesser known stock. The reason is simple. If the former investment goes bad, general reaction is that something is bad with the company. On the other hand, if the fund manager loses his bet on a lesser known stock, it becomes a personal mistake. For the fear of not looking bad, a fund manager is unlikely to take even calculated risks and earn huge returns. This again is a privilege for an individual investor as he will be less image conscious than a fund manager.
To conclude, understanding the behavior is a must before one jumps headlong into picking up the winners. As for the latter, we will continue in the next article.
||Richa Agarwal (Research Analyst), Managing Editor, Hidden Treasure has over 7 years of experience as an equity research analyst. She routinely scours the small cap universe for fundamentally strong companies trading at attractive prices. Having degrees in both finance as well as engineering has served her well in analysing business models across the small cap space. Richa is also the specialist in our team for the Oil & Gas sector.
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