Finshield Advisors - Blog , Behavioral Finance

The Smart Investor!

Thu, 19 Sep 2024 03:30:00 +0000

The Tale of the Smart Investor

In the bustling city of Mumbai, there lived an investor named Raj. Raj prided himself on his keen eye for stocks. Over the past year, he had seen his investments soar. The Nifty 50 was up 30%, the NSE 500 by 40%, and the small-cap index by a whopping 60%. Raj often recounted tales of how he had meticulously analyzed financials and management to pick stocks that had now tripled or even quintupled in value.

But let's rewind to the beginning of 2023. Back then, Raj wasn't feeling so confident. The Nifty had returned a mere 4% in 2022, and the small-cap index was down. His investments in Nasdaq ETFs and crypto assets from the 2021 boom were staring at a 40% loss. Raj blamed the US Federal Reserve's interest rate hikes, the Russia-Ukraine conflict, and the subsequent spike in commodity prices for his misfortunes.

Raj's friend, Anita, reminded him of the time he had invested in small caps during the 2017-18 boom. By the end of 2019, the small-cap index had plummeted by 65%, with many stocks down by 80-90%. Raj had cursed stock operators and shady managements back then.

Anita pointed out a pattern: Raj attributed his successes to his skills and his failures to external factors. This self-attribution bias wasn't unique to Raj; it was a common human trait. When Raj landed a job, he believed it was due to his talent and qualifications. But if he didn't get the job, he blamed the interviewer or other external factors.

In investing, this bias led Raj to overestimate his skills during bull markets and blame bad luck during downturns. This overconfidence resulted in taking on excessive financial risks, aggressive trading, and concentrated portfolios. Raj's refusal to acknowledge his mistakes meant he was doomed to repeat them.

Anita reminded Raj of the saying, "Don't confuse brains with a bull market." She emphasized that both success and failure in investing involved an element of luck. Raj needed to recognize this to avoid overconfidence and make better investment decisions.

How do you balance recognizing your investment skills with acknowledging the role of luck in your successes and failures?

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IPO Investing - Our view

Thu, 12 Sep 2024 04:30:00 +0000

Is It Worth Investing in an IPO? Let’s Dive In!

Hey there, fellow investment enthusiasts! 🌟 Ever found yourself daydreaming about striking gold with the next big IPO (Initial Public Offering)? Well, you’re not alone! The allure of getting in on the ground floor of a promising company is like the investment world’s version of finding a golden ticket in a chocolate bar. But before you dive headfirst into the IPO pool, let’s chat about whether it’s really worth the splash, especially here in India.

The IPO Hype Train 🚂

First things first, IPOs are exciting! They’re like the red-carpet events of the stock market. Everyone’s buzzing, analysts are chattering, and there’s a palpable sense of “What if this is the next big thing?” Remember when Zomato went public? Or more recently, the buzz around companies like Paytm and Nykaa? The hype is real, folks!

The Glitter and the Gold ✨

So, why do people get so excited about IPOs? Well, there’s the potential for a quick profit. Imagine buying shares at the IPO price and watching them skyrocket on the first day of trading. It’s like hitting the jackpot! For instance, the IPOs of companies like IRCTC and Avenue Supermarts (DMart) have shown impressive returns.

The Flip Side of the Coin 🪙

But hold your horses! Not all that glitters is gold. Investing in IPOs can be a rollercoaster ride. Sure, some IPOs soar, but others… not so much. Remember the debacle with Paytm’s IPO? It had a lot of hype but didn’t quite meet expectations initially.

Do Your Homework 📚

Before jumping on the IPO bandwagon, it’s crucial to do your homework. Dig deep into the company’s financials, understand its business model, and scrutinize its growth potential. A strong underwriter and a solid prospectus are good signs. But beware of the hype – sometimes, it’s just that, hype.

The Long Game 🎯

If you’re in it for the long haul, remember that many IPOs don’t perform well over the long term. Studies have shown that the majority of IPOs underperform the market over three to five years. So, patience and a keen eye for detail are your best friends here.

To IPO or Not to IPO? 🤔

In the end, whether to invest in an IPO boils down to your risk tolerance and investment strategy. If you love the thrill and can handle the risk, IPOs might be your cup of tea. But if you prefer a more stable and predictable investment, you might want to wait until the company has a proven track record.

So, is it worth investing in an IPO? The answer is a resounding “maybe.” It can be a thrilling ride with the potential for great rewards, but it’s not without its risks. Do your research, stay informed, and happy investing! 🚀

What do you think? Ready to take the plunge or prefer to play it safe? Share your thoughts in the comments below! 😊

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Election Vs Investments: what matters

Wed, 05 Jun 2024 09:49:30 +0000

Elections: does it have a meaningful effect on your investments?

The Indian general elections have a discernible impact on the stock market, and understanding historical trends can guide investors. Historically, volatility in the market goes up significantly one month before the result date and reduces after results are announced.

Imagine the stock market as a roller coaster ride. This year, the market was expecting the same government to stay in power after the elections. So, like a roller coaster going up, the market kept rising until about a week before the exit polls (when they predict election results). But then, things got confusing. The rumours around exit polls gave mixed signals, like someone shouting “left” while the roller coaster was going right. This caused a week of downward corrections.

Over the weekend, the exit polls were announced, and guess what? They matched what the big market players expected. So, the market rebounded, like the roller coaster suddenly going up again.

This is an example of how irrational the market can be in the short term - it is purely driven on the behaviour of the majority of the market participants and nothing to do with fundamentals. Now, let’s zoom out. These ups and downs around elections don’t really matter much in the long run. Whether the election result is “positive” or “negative,” it tends to fade away over time, like the excitement of a roller coaster ride after you step off.

Traders (the folks who play the stock market like a game) are the ones who benefit from this, they love short-term volatility. They make money by betting on whether the market will swing up (by going long) or down (by short selling) based on these election moves.

Let’s explore some examples of the Indian stock market performance during general elections:

1999 General Elections:

After the Kargil War, the BJP-led National Democratic Alliance (NDA) secured a clear victory.

The stock market showed resilience, declining by only 2.10% in the month after the elections. However, it rebounded strongly in the following six months, gaining an impressive 40.20%.

2004 General Elections:

The unexpected victory of the Indian National Congress (INC)-led United Progressive Alliance (UPA) led to a significant drop in the stock market.

Investors faced uncertainty, resulting in a bearish trend during this period.

2009 General Elections:

The stock market was already recovering from the 2008 global financial crisis, and investor sentiment was cautious. Reacting to the exit polls, the market exhibited mixed signals as it slipped but managed to remain above the key moving averages.

Despite the mixed exit polls, the stock market exhibited resilience. The Sensex and Nifty 50 soared over 40% each from May 18 (the first trading day after election results) to December 31, 2009.

2014 General Elections:

The 2014 elections were a turning point for the Indian stock market. The BJP’s promise of economic reforms and a business-friendly environment led to renewed optimism among investors.

The Sensex rose by approximately 25% in the months leading up to and following the election results.

2019 General Elections:

The BJP-led NDA secured another victory, and the stock market responded positively.

Despite initial volatility, the market rebounded significantly in the long term. Many stock indices hit all-time highs, reflecting investor confidence in stability under the BJP-led government.

In essence, the Indian stock market has demonstrated resilience in the face of election-related uncertainties, emphasizing the significance of long-term structural reforms as drivers of sustainable growth. These historical examples highlight the importance of staying invested and focusing on broader economic trends rather than short-term election noise.

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FOMO and its effects

Tue, 05 Mar 2024 07:57:17 +0000

The Fear of Missing Out: Anecdotes from the Indian Investment Landscape

In the bustling bazaars of India’s financial markets, a psychological phenomenon known as the “Fear of Missing Out” (FOMO) has been weaving its way through the minds of investors. FOMO is not just a buzzword; it’s a powerful force that can drive investment decisions, often leading to regrettable outcomes.

The Tale of the Tech Stock Temptation

Take, for example, the story of Arjun, a seasoned investor who prided himself on his disciplined approach to the stock market. He had always emphasized the importance of research and due diligence before committing his hard-earned money to any venture. However, the tech boom of the late 2020s presented a siren call too alluring to ignore.

Arjun watched from the sidelines as his colleagues and friends reaped substantial returns from the latest tech sensation, InnoTech Solutions. The company’s stock seemed to be on a relentless upward trajectory, and the media was ablaze with stories of its innovative breakthroughs. The buzz was inescapable, and Arjun felt the pangs of FOMO gnawing at him.

Eventually, Arjun succumbed to the pressure and invested a significant portion of his portfolio in InnoTech, without his usual thorough analysis. The fear of missing out on what everyone else was profiting from clouded his judgment. Unfortunately, the tech bubble burst shortly thereafter, and InnoTech’s stock plummeted, leaving Arjun with a costly lesson on the perils of FOMO-driven investing.

The Cryptocurrency Craze

Another anecdote comes from the world of cryptocurrency. Priya, a young and enthusiastic investor, was drawn to the crypto market by stories of overnight millionaires and the promise of a digital financial revolution. She watched as Bitcoin and other cryptocurrencies soared to dizzying heights and felt an urgent need to be part of the action.

Despite warnings from financial advisors about the volatility and speculative nature of cryptocurrencies, Priya, driven by FOMO, poured her savings into various digital coins. The rollercoaster ride of the crypto market proved too much, and the inevitable downturn wiped out a significant portion of her investment. Priya’s experience serves as a cautionary tale about the dangers of letting FOMO dictate investment strategies.

The Social Media Effect

Social media has amplified the FOMO effect among investors in India. Platforms like Twitter and Reddit are rife with tales of quick gains and hot tips. Ravi, a novice investor, was influenced by a trending hashtag about a small-cap stock that was predicted to be the next big winner. The fear of missing out on a golden opportunity led him to invest without proper research. The stock turned out to be a pump-and-dump scheme, and Ravi’s investment vanished as quickly as the hashtag trend.

Conclusion: FOMO and the Indian Investor

FOMO is a potent force in the investment world, and Indian investors are not immune to its allure. The anecdotes shared here highlight the importance of resisting the urge to follow the herd blindly. Successful investing requires patience, research, and a level-headed approach, especially in the face of the relentless noise generated by market hype and social media frenzy.

Investors in India, and indeed around the globe, would do well to remember that the fear of missing out can lead to the very real consequence of missing out on financial stability and long-term growth. As the saying goes, “Invest in haste, repent at leisure.”

These stories are a blend of real investor experiences and common scenarios that illustrate the impact of FOMO on investment decisions. They serve as reminders that while the fear of missing out is human, it should not be the guiding principle in the world of investing.

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Frugal and Rich

Wed, 07 Feb 2024 11:43:08 +0000

Be a RICH frugal person

One of the most famous philosophers, writers and statesmen in ancient Rome is Marcus Tullius Cicero. But he's shown that even the privileged can practice frugality. Cicero was a frugal man, even though he had been born rich and had never had to worry about money in his life. In our current society, we have an extreme relationship with money. We see that people live on either of these two sides:

Spending almost everything you've earned.
Spending almost nothing you earn

All or nothing. This is a characteristic of our times, too. We either live strict lives or we're so careful that we squeeze every penny out of everything. Or we tend to spend a lot of money and end up living from salary to salary, never creating any kind of long-term wealth. The truth is you don’t have to live on these extremes. You'll be able to live a balanced, frugal, and still rich life.

Being frugal has always been considered a virtue but, very few people practice it in their own lives. This in my opinion is due to the perceived definition of the word - Frugal, for most people, means depriving yourself of something you want and could afford.

What if, you do not want something to begin with because you get your pleasure and identity from sources that cannot be purchased. Most people are wired to seek status and success, not necessarily happiness. Such people, reject what the world tells them they should want and look deeper, finding their happiness elsewhere.

Frugal lifestyle is a way of living that involves spending less, saving more, and finding value in simple things. Frugal lifestyle can help you achieve your financial goals, reduce stress, and live more sustainably. As someone working in the personal finance domain, "Warren Buffet" has always stood out for me as a proponent of the same. There are people closer home in India who practice frugal lifestyle. Ex-Infosys Chairman Mr. Narayana Murthy and Mrs. Sudha Murthy - They are known for their humble and simple lifestyle, despite being billionaire's. They live in a modest house, drive a modest car, and travel in economy class. They also donate generously to various social causes and encourages Infosys employees to do the same.

Frugal lifestyle is not about being cheap or miserly, but about being smart and mindful of your spending and saving. Frugal lifestyle can help you live a more fulfilling and meaningful life. Riches means abundance. Not only financially, but also mentally. If you are afraid to spend or lose money, you don’t have abundance, you’re thinking about scarcity.

Be a RICH frugal person. Live simply because it makes you grateful, peaceful, and focused on your work.

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