Personality and rationality
Human behavior is a complicated concoction of three elements: the Id, the Ego and the Superego as per the psychoanalytical theory propounded by Sigmund Freud.
The id is present in a person from his or her birth and is a set of primitive behavioral traits. Ego, is that element in a personality which connects with the reality. It strives to satisfy personal desires in a socially acceptable manner. Lastly, the Superego, combines the moral standards inculcated into us by our parents, social values and the inherent sense of the right and the wrong.
If the investor’s idiosyncrasies have to be addressed, the superego is perhaps the right place to start. In order to become a smart investor, one needs to acquire skills which will help them make an objective assessment about the merits and demerits of a company. Investors who intend to master the art of investing need to concentrate on understanding both the fundamentals and markets. When the Superego personality trait works in combination with the knowledge and expertise of the market, it is easier to get a more lucid “bigger picture”.
Known or not known? That is the question
“To know that we know what we know, and that we do not know what we do not know, that is true knowledge” is what was stated by Confucius and quoted by Henry David Thoreau. Thoreau, probed further “How can we remember our ignorance, which our growth requires, when we are using our knowledge all the time?”
In the investor’s world it is important to acknowledge that there are a lot of things which remain unknown. Claiming to know what the future holds and trying to frame investment decisions based on such unfounded claims could result in hara-kiri. It is good to be with a group which admits that they ‘do not know’ rather than hitch to a group which ‘does not know that they do not know’.
Overconfidence in one’s ability to forecast the future vis-à-vis the investment scenario is a trait which could seriously undermine the investor’s interests. The fact remains that the world is run by people who claim to know everything, not realizing that they hardly know anything.
Behavioral essence: Fear and confidence
“Darr ke agey Jeet hai” (there is a victory beyond fear) goes the tag line of a soft drink company. In the investor’s world, this can be a worthwhile line to remember. Emotions and fears are things which have to be eliminated if one wishes to be successful in any investment endeavor. While it is good to be prudent, ultra-caution due to fear and reticence can often be counterproductive. While it is necessary or rather imperative to realize that certain situations are ‘too good to be true’, there are also others which are ‘too bad to be true’.
Investors need to be proactive. A Jewish proverb says that “life is what happens to you when you are making other plans”. It is no different in the investment world. While one may be planning to carry out a buy or sell transaction, sudden developments may change the course of the transaction. It is important to be aware and well-informed about the positives and negatives in the market on a day-to-day basis. The bottom-line remains that a smart investor has to remain unemotional at all times.
Market dynamics and the crux
Market dynamics will operate differently under different situations. In a government controlled scenario things will shape up differently than when a free market operation is in vogue. The investment pattern has swung from ‘growth’ to ‘safety and income’ and in some time will again swing back to ‘growth’. This can be translated as a shift from equity to bonds and back to equity in the future. What will evolve as an attractive investment avenue over the years will depend on a lot of factors like the extent of freedom granted to the market to take its own decisions.
A lot of discussion occurs on the subject of adoption of machines for analyzing data instead of humans. However, there are two schools of thoughts on this; one feels that there exists market inefficiencies and careful analysis can lead to adequate gains, while the other school is of the opinion that there is nothing called market inefficiency. It is a general belief of the first school, that as long as people do not understand assets fully, take emotional decisions, buy high and sell low, there will be a section of investors who will gain and make money in the market.
All’s well that ends well
The Stock market remains an intrigue for some. For others it is a structured and professional place which runs on its own set of rules and dynamics. For the individual investor to be successful it is very important to adhere to a disciplined approach, ignore emotions and other idiosyncrasies of human behavior and stick to practical decisions based on actual knowledge.
At the end of the day the stock market is for the people, by the people and of the people and it becomes imperative for people to be aware that behavior has a big part to play in the success or failure as an investor.