How to avoid being a victim of greed in securities market?
There is a saying on Dalal Street that Fear and Greed are the two primal instincts that drives the sentiments of Investors in stock markets. “Greed” means “intense and selfish desire for something, especially wealth, power, or food”. Greed is actually what makes us, what we are today.
Greed is actually not only bad, it is sometimes good also. It drives us to succeed and thus all these inventions and discoveries in a way are a pathway for people to achieve that greed. Greed can be categorised as greed to make more money and greed to keep it. In stock market people actually give their loss making stock a longer run to recover and cut short their winning stocks giving them a smaller run.
Do you remember a time when you were holding the stock for long time even more than your target price, or sold a stock too soon just because it’s price was falling but had great fundamentals, all this is nothing but greed. Greed spoils the trader’s discipline. A great tool that helps us understand the level of greed and fear in the stock markets is the Volatility index called the VIX. VIX uses short-term near-the-money put and call options to gauge suggested volatility of the stock market index options for next 30 days. It can be used as a proxy for the entire market.
Even Warren Buffet invested in the right stock, at an appropriate time and price and only in a business that he understood very well. So following are some of the tips that can help you to avoid being a victim of greed
- Holding the stock for too long ( beyond target price) –
You invest in a stock with a particular exit / target price. So, when the stock achieves that target price, re-evaluate the stock and see if there is further scope for it to make gains. Just because it gave you 20% returns in a year does not mean it will give you 20% every year. So sell when you have to.
- Chasing or following a market/ stock
When the price of a stock is increasing, people tend to put money into it without understand the fundamentals and just go with the wave. This is when bubbles are formed and when they burst they harm the entire market and burn the fingers of every greedy man.
- Focus on long term wealth generation and not Look to become rich overnight
Media highlights the rags to riches story more profoundly than people who became rags overnight. This tends to give fuel to the greed alive in people. Do not get into the mental frame of mind to become rich overnight. It does not happen. Rather learn the nuances of the phenomenon and how the person achieved it, what was his investing style etc.
- Stick to what you know best
There are many investing styles, so if a style is working for you, give it time to give you fruitful results and do not keep changing styles frequently.
- Have the stomach to bear losses
It is an inherent arts of the market, you will face losses bit you should make more gains then losses. Even warren buffet has invested in stock that has losses
- Admit your mistakes, move on and don’t commit it again
If you have chosen some wrong stock or evaluated something wrongly, know when to quit, re-evaluate and move one and learn from it.
How do you avoid being a victim of greed in securities market? Please do comment.