Financial Models - How It Is Helpful To Run The Business

Get Rid of Childish Mentality Before Investing

When comes the matter of money, human emotions influence our decision-making process. We all cross various stages of life; childhood, adulthood, and old age. When we enter our early adulthood age, we start taking financial decisions. People start taking interest in stocks and other methods of investment. As time passes, they become a mature person but many of them never thought that still a child influencing their decisions. 

I have seen in my career that many people stock buying decisions influenced by their childish mentality. Due to this mentality many times they suffer losses. They want to become rich quickly but after few incidents, they left the market forever. 

I have observed the following emotional immaturity while buying stocks by various investors: 

1. Large Quantity: Children want to keep a large number of toffies and chocolates in their pockets. They are not satisfied by taking only one or two pieces. Even they are unable to eat but they want to keep it in their pocket and feel very happy by just keeping it in their pockets. 

Many investors have the same mentality when they consider buying stocks. They are always interested in ultra-cheap penny stocks or those stocks which they can accumulate in bulk quantity without understanding the fundamentals of the company. At first, they see the price and calculate it mentally that how much quantity they can buy, and if the quantity comes few then they simply ignore all fundamentals, all stock advice, they are not ready to give even one percent heed of the stock. What matters most for them is quantity. The same childish mentality who wants to keep more toffies and chocolates in their pocket. 

I have observed that many investors’ portfolio carries only those stocks which they can accumulate in big quantity. Although all the fundamentals have gone of those stocks, still they keep holding and holding it for years. 

Holding a big quantity of stocks in their portfolio satisfying the childish mentality that they have a large number of toffies and chocolates in their pockets although there is no meaning of that. 

When we are driving on a road and we know that now we are traveling on the wrong path, what action we will take – immediately U-turn. In the world of investment when you come to know that your decision in a particular stock has gone wrong, you should also take a U-turn, so that the direction of your portfolio will be right i.e., it will grow at a healthy pace. 

   2. Emotional Vicissitudes: Children often cry and please very easily.          Adults seldom do. 

The same behaviour I have observed among many investors. When prices fall below their buying price, they immediately feel panic and start collecting information from their sources looking for confirmation that their money is safe. When prices jump few rupees immediately, they cheer and rush to make a profit quickly. 

3. Impulsive behaviour: Children are impulsive, they speak recklessly, don’t want to wait for anything, and take impulsive action without pausing to think about the potential consequences. Adults calm themselves, collect more information before taking any action. 

This behaviour I found among many investors. Suddenly, they got a call and someone is saying that the price of such stock is going up. Immediately they gave a buy order without a second thought that whether the information is correct or not. Without checking the fundamentals of the company. The impulsive behaviour provokes them to take action without thinking about possible consequences which are likely to incur if the said information is not correct. 

4. Blaming Others: Children blame others when anything goes wrong. Adults try to identify the problem and look for solutions. 

When investors buy stocks on the recommendation of others and prices start falling, immediately they start blaming others. While a mature investor tries to identify the reason for a price drop and decide whether it is a buying opportunity or something that went wrong in the company.

5. Unable to Face Reality: Many times, children speak untruth to stay out of trouble. While grown-up ready to face the reality. 

When markets are performing better, many investors put borrowed money in the stock market. Sometimes they made money and later many start gambling. When anything goes wrong, they try to hide such kind of information from their family and friends, not ready to accept their mistakes, start speaking untruth and try to avoid themselves from that situation. They are still not grown-up who is ready to face the reality.

6. Comfort Zone: Children are unable to take a risk and they always look for protection and a comfort zone. 

Many investors feel protection and comfort zone when they know that their friends are buying the same stock or any big name has also bought the same. They feel the protection of their money. Without doing even one percent research of the company or even not opening the website of the company they bought the stock in bulk quantity and feel safe. The barrier of a comfort zone is one of the biggest barriers for an investor. To break the barrier, you have to do your research.  

7. Self-admiration: Children want that everyone will listen to them only. They feel very admired when elders in their family attentively listen their great job is done and they keep saying among others time and again. While psychologically strong people prefer to listen to others. 

The same behaviour I observed among many investors when they book profit in any stock. They start saying that how smart they are, how they book profits. The same tendency of self-admiration and keep saying the same event among their surroundings.  

Rather than admiring their small success here and there, psychologically strong people utilize the time for their bigger goals. 

The Bottom Line

To leave the childish mentality is difficult for many investors. We all learn from our mistakes but if you will stick with the childhood mentality then you will never learn from your mistakes. Children’s thinking is shallow, they cannot go deep because their mind is not yet developed. Your childish mentality will not allow you to go in deep if you will trumpet your small success in stocks here and there. Why because you have not gone deep repetition of success is difficult, soon you will suffer loss. 

As our body requires food, feeding of mind is also necessary by good learning. 

Understanding the Dividend

How Dividend Provides Early Signal About Selection of Stocks

 

Dividend

A dividend is a share of a company's profits distributed to shareholders as a part-owner of the company. After earning profits management can choose an option to retain it or distribute a portion of profits as dividends to its shareholders.

 

Although, dividends are not guaranteed and depend upon the discretion of the board of directors. A young company needs to reinvest all its capital to fuel growth and may decide not to declare any dividend. But when the growth slows and further expansion is limited, declaration of dividends will be necessary to keep shareholders around.

 

Declaration of Residual Profits as Dividends

Declaration of residual profits to its shareholders as dividends is a visible sign of the financial health of the company. It also signals that the growth of the company has slowdown and the time have come to reward its shareholders. The management who is sitting at the driver's seat knows better the financial prospects of the company. Therefore, stable or rising dividend from the previous year's indicates a lot of financial health about the company.

 

A company's dividend declaration to its shareholders is a device that investors can use as a signal about the prospects of the company. Apart from financial ratios, clear scrutiny of historical dividends provides a lot of information about the prospects of the company.

 

Steady and Gradual Increase in Dividend Payment

When a company has less room to grow and earnings profits, management is willing to reward their shareholders and continue to pay handsome dividends. The trend likely to continue for years if everything goes smoothly. Holding such types of stocks is good in a portfolio because not only do they provide risk-free income but price appreciation is also there.

 

When management declares a dividend, they know better those investors are watching their policy closely. Fluctuations in dividends give any positive or negative signals in the market unnecessarily. Therefore, a steady and gradual increase in dividend payment is a healthy sign and most of the companies adopt this policy.   

      

Rapid growth companies unlikely to offer dividends but the growth must be visible while looking at its sales.

 

A Sudden Cut in Dividend

In case of any negative signal about the prospects, the likely action of the management to save all cash outflow. Therefore, a sudden cut in dividends is a clear indication that the company likely to face a shortage of cash or other challenges in near future. A company may skip paying a dividend if they plan for any reinvestment or to cover costs.

Therefore, an investor should have an open eye on all the developments and it is good to avoid such kind of stock for the time being. If you want to go ahead then you must have sound logic behind the sudden cut or skip in paying a dividend. Such type of action indicates that an investor has to do further scrutiny of the stock and cannot take it lightly.

 

When an established company which is paying dividend at a regular interval, suddenly increases, decreases or skip in paying, an investor must have to examine all the scenarios.

 

Because dividends provide a signal about the financial health of the company, I have seen in my experience that most of the companies hesitate to reduce what they have already declared in the previous year. Even after facing problems from many fronts, the company does not want to give any negative signal in the market, therefore, they continue with their stable dividend policy.

 

However, every reduction in dividend does not give a negative signal about the company, neither increase provides a positive signal. There are times when a company continues to pay a stable dividend and not able to increase even for years.

 

Dividend Yield Strategy

The theory of “Dogs of the Dow” says that select 10 stocks with the highest dividend yields from the Dow Jones Industrial Average. However, I have seen in my experience that those stocks where dividend yield is more than 10% are not good enough to include in a portfolio. Large-cap stocks, where dividend yield is more than the yield of Nifty and dividend is stable or rising, are good to include in a portfolio. For midcap stocks, where yield is more than 3% is good to consider if others parameters are supporting.

 

The Bottom Line

The dividend provides a lot of valuable information about the company. A study of historical dividends provides a clear signal about the financial health of the company. When a company suddenly cut the dividend, the time has come to examine all the developments as it may signal a problem is coming in near future.   

 

A company can't keep growing forever, ups and downs are part of the business. Dividends provide a lot of valuable information about the company. While analyzing a stock it simply can't be ignored.  

 

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