Self-defeating behaviour of stock investors

Investing is simply a struggle for self-control. You can’t control what the market does, but you can control what you do in response. Your returns depend less on whether you pick good investments than on whether you are a good investor

“If you don’t know who you are, the stock market is an expensive place to find out who you are”—
Adam Smith, The Money Game

Successful investing is not easy because it requires discipline and patience. You need to hold on to your stocks for long periods of time. But, it is simple, it is all about commonsense. However, people have let themselves down frequently by buying high and selling low. In euphoric times, people load on stocks as if there is no tomorrow and end up losing money on them. 


Investing is simply a struggle for self-control. You can’t control what the market does, but you can control what you do in response. In the long run, your returns depend less on whether you pick good investments than on whether you are a good investor. 


Self-defeating behaviour

Research in the field of ‘Behavioural Finance’ has shown that most people get into trouble while investing in stock markets because their emotions interfere with rational thinking and decision making.


Here are seven of the irrational tendencies that cause trouble while investing in the stock markets.

  1. Overconfidence: Errors in judgment happen because people are generally overconfident. They exaggerate their own skills and end up taking more risks as they become overconfident about their guesses and over-optimistic about their prospects. It can be particularly damaging while investing in stock markets and in managing our own financial affairs.
  1. Investor myopia:  People put too much emphasis on few chance events thinking they have spotted a trend where none exists. When people see something happen for two or three times in a row and just assume it is going to happen again. It is a flawed tendency to invest in something that has been going up fast in the assumption that it will keep going up fast.
  1. Loss aversion: As studies conducted by Kahneman and Tversky in 1979 found, “the pain of a loss is twice as much as the pleasure of an equivalent gain”. For example losing an amount of Rs5,000 hurts 2 to 2.5 times more than winning Rs5,000 feels good. It is this aversion to loss that makes investors unduly conservative and at a great cost to themselves.
  1. Overreaction bias: People tend to overreact to bad news and react slowly to good news. Thus, if the short-term performance is not good, the typical investor’s response is a knee-jerk reaction; it is an abrupt and ill-considered reaction. When some bad news hits, markets crash drastically because investors sell out and scamper for safety.
  1. Herding tendency: It is irrational investor behaviour that is driven by greed during times of euphoria and fear in the crashes. When an individual investor tries to join the crowd of others in the rush to get in or out of the markets, he will get trampled.

You may also want to read A simple investment that really works

  1. Buying high and selling low: You are inclined to buy high and sell low because you are averse to the risk of looking bad to yourself and your dear ones. You would want something with the best performance to go into your portfolio and you would want whatever has worst performance to be coming out—because at the time of the decision it will make you look better. Or, if you buy because the market has gone up and sell because the market has gone down. This way you end up buying when prices are up and sell when prices are down. You can never make your share of returns by buying high and selling low—you can only lose.
  1. Market timing: For most investors it is not possible to make money by anticipating the future course of the stock market. In the roller coaster days of the stock market, who knows what is up or down? You never know what is going to happen next. The BSE Sensex could be 250 points up today and 300 points down the next day. It is a loser’s game trying to profit from speculating on the market movements. If your emphasis is on market speculation, you will end up with losses and unhappy consequences of a stock market speculator.

As Benjamin Graham, one of the greatest investors said, “The investor’s chief problem—and even his worst enemy—is likely to be himself”. You can win your battle for investment survival by avoiding these self-destructing tendencies.


To read more on stock market analysis done by Moneylife, click here.


(Nilesh Kamerkar is the managing partner of Capital Partner)



Suiketu Shah

4 years ago

Nice article.However,all the above theories are good in pricipal but wealth management companies and most MF agents make you do just the opposite in atleast 3-5 purchases especially as regards timing.
They boast about their knowledge but when they sit across the table they dopnot even know basic of one of the most impressive growth companies in the recent past-VST Industries.

I read someone writing on ml saying good stocks are hard to find.Good stocks are very easy to find if one reads only ml.



In Reply to Suiketu Shah 4 years ago

Thank you Mr.Shah, appreciate your feedback.

Suiketu Shah

In Reply to Nilesh KAMERKAR 4 years ago

Most welcome Mr Kamerkar:)

Stock market rally: Opportunities and lessons for small investors

As an investor all of us need to be rational in our approach towards investment. The most important lesson that comes from the current rally is that long-term in the stock market can really be long

The Indian stock market is on an upswing. The popular index, “BSE Sensex” touched 20,000 once again on 15 January 2013. This is almost after two years that the index has crossed 20,000 and the way things stand now, the market may as well cross 21,206 that it had attained on 10 January 2008. There are many potential positive triggers that may drive market to higher levels in the days to come. Ongoing announcements of corporate results and the forthcoming RBI (Reserve Bank of India) policy may provide an upward push to the market. What is heartening to note is that apart from the Sensex, other indices and stocks in general have also shown northward movement. It seems we are on the verge of overcoming the lost half-decade in which started on 10 January 2008 when stock market had touched an all-time high. Since then the markets have offered nothing to a passive investor who would have followed the Sensex or Nifty. Whether markets will breach the all-time high, this rally comes has come out as a relief for investors.

Now that the market looks relatively immune to major downward movement, what should retail or small investors do now with this rally? This rally provides some opportunities as well as lessons for investors. As far as opportunities are concerned, this rally is a golden opportunity to get rid of the stocks in which investors may have been stuck for quite some time now. So if you had bought a stock which was hammered during adverse market conditions from 2008-2012 and does not have strong fundamentals, this rally is a golden opportunity to sell these such stocks.

Also by Vivek Sharma: Do stocks behave differently during the results season?

Additionally, if you had bought ULIP (Unit Linked Insurance Plans) and got stuck as the investment value had gone down, then check out if whether you have recovered the capital invested or got a small return. If either of the two has been achieved, then it is the right time to exit. There is no point in having any attachment with these investments as they hit the overall portfolio value. Even booking a loss in these stocks will make sense.

While the rally provides an opportunity, it also brings many lessons along with it. Never buy stocks unless you understand a business or the company running that business. So even if the rally continues in the stock market, don’t get overwhelmed by the mad rush which often dominates the stock market in such conditions. Do not buy stocks which are bought and sold on tips. It is important that lessons learnt during last four years of stock market volatility are not forgotten this time. Markets movements may be very lethal and corrections in market may result in huge losses. Hence, it is important that you never invest in stocks which lack strong fundamentals. Take advice of experts on this or take the mutual fund route. Otherwise be ready to burn your fingers even next time.

Investors need to remember that in spite of the recent surge in the stock market, it is not the right time to sell quality or blue-chip stocks that you own, unless you have a specific requirement for funds or you believe that your investment objective has been achieved. Continue your investments in such stocks. Even if the Sensex did not grow at all from 2008 to 2012, some of the quality stocks like ITC, HDFC Bank, HDFC, etc, continued to grow and added value to the investors’ portfolio. Some of stocks like Havells not forming part of Sensex have comprehensively beaten Sensex during the last five years, giving a clear cut message that the Sensex may not perform but specific stocks will.

There is no easy money in the stock market and as an investor all of us need to be rational in our approach towards investment. Stock picking is an art which very few experts posses and hence it is safe for investors to try their luck in stocks which have performed over a period of time. Also the most important lesson that comes from this rally that long-term in the stock market can really be long. So investments in stock market should always be done with a long-term horizon which indicates that it takes time for stocks to bring desired return.

Read more articles from Vivek Sharma, here.

(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)



Suiketu Shah

4 years ago

One of the main reasons retail investors have fled the equities market in India is widespead deliberate misleading by stock brokers and agents and rightly so.

Even a company like HDFC ank and HDFC securities indulge at the top level into deliberately misleading investors is an indication that trsuting the wrong agents in equities can be surefire disaster.

This again reemphasised who moneylife is such an important tool (a musthave) for every equity investor.Once is sure of getting correct information in contrast to most other media publications or channels who wl do anything for money.

JBT scam: Chautala, son and 53 others convicted by CBI Court

The court had earlier found prima facie evidence against Chautala, his son Ajay and 53 others, including IAS officers Dhar and Kumar. The 55 persons convicted by the court on Wednesday include 16 women

New Delhi: Haryana's former chief minister  (CM) Om Prakash Chautala, his MLA-son Ajay Chautala and 53 others were on Wednesday convicted by a Delhi court for the illegal recruitment of over 3000 junior basic trained (JBT) teachers in the state, reports PTI.


After the court pronounced its judgement, all the convicts were taken into judicial custody. The court has fixed 22nd January for pronouncing the quantum of sentence.


Special Central Bureau of Investigation (CBI) Judge Vinod Kumar held Chautala, his son and others guilty of offences under the Indian Penal Code (IPC) and Prevention of Corruption Act (PCA).


Apart from the Chautalas, Sanjiv Kumar, the then Director of Primary Education, Chautala’s former Officer on Special Duty Vidya Dhar and Sher Singh Badshami, political advisor to the then Haryana CM were also convicted by the court in the case.


The court has fixed 17th, 19th and 21st January for hearing the arguments on sentence.


The court had framed charges against them under Sections 120-B (criminal conspiracy), 420 (cheating), 467 (forgery), 468 (forgery for cheating), 471 (using as genuine a forged document) of the IPC and provisions of the PCA.


The court had reserved its verdict in the case on 17 December 2012 after conclusion of final arguments by the CBI and the defence counsel.


Out of the initial 62 accused, six had died during the trial while one had been discharged by the court at the time of framing of charges.


The court had earlier found prima facie evidence against Chautala, his son Ajay and 53 others, including IAS officers Dhar and Kumar.


Kumar was made accused by the CBI after he exposed the JBT recruitment scam.


The 55 persons convicted by the court on Wednesday include 16 women.


Except the accused, their counsel, prosecutors and the court staff, the judge did not allow anyone else to enter the court room.


The relatives and family members of the accused and media persons were asked to stand behind the barricades set up outside the courtroom, as the proceedings were held amidst tight security.


The CBI had on 6 June 2008, charge-sheeted the Chautalas, Indian National Lok Dal (INLD) leaders, and others in connection with the scam relating to appointment of 3,206 junior basic teachers in the state during 1999-2000.


In its charge-sheet, the CBI had said that the probe established the manner in which the second lists were made by calling the chairpersons and members of the district-level selection committees of 18 districts to Haryana Bhawan here and a guest house in Chandigarh, where the modalities were worked out.


The CBI, in its charge-sheet, had also said that the father-son duo had used forged documents to appoint 3,206 teachers.


The Supreme Court had in its order on November 25 2003, directed CBI to take up the investigation of the case.


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