Psychology And Investment

Preface 

Psychology plays an important role when it comes to make a decision as the matter of investment is a significant matter and it is not just about crunching the numbers. Behavioural economics states that people are not always rational when it comes to make an important decision, and while taking a decision our mind is influenced by various other factors. People are unable to make a proper decision due to; lack of proper information, failure to analyze the situation properly, an unwillingness to learn from their mistakes, constraints of mind or not having enough knowledge about the subject, etc.

Knowledge about the subject alone is not sufficient enough to make a good investment decision. The study of the human mind and behaviour and how it relates to and affects the process of investing is not only important but also very interesting because each person takes the same types of investment differently.

At times the stock market moves irrationally where the numbers do not support the trend. In such situations, psychology helps us to recognize the erratic behaviour of the market and clear the way for any decisive action. Knowledge of the subject can be learned by reading books but overcoming emotions requires both knowledge and experience and the experience of loss is more important than gain.

When I started my career as a research analyst at a business news channel, I had the opportunity to meet various kinds of investors and market experts. Later when I moved on to different profiles, I carefully observed that psychology matters most to everyone before making any investment decision. Human sentiments deeply influence the decision-making process and it is very difficult for an investor to take any such action that is not influenced by their surroundings. 

Psychology is closely related to investing and when people fail to understand human behaviour, they make wrong investment decisions. The functioning of the mind influences every investment move and the beginning is associated with various characteristics of human emotions such as greed, fear, and many other attractions and resistances.

In this book, I have explained in detail what are those attractions and resistances which I observed while dealing with different types of persons. I felt that the time has come to share my experience with the readers that how psychology impacts us deeply while making investment decisions and with a better understanding of how we can avoid ourselves from taking wrong decisions.

The second part of the book deals with how to analyze a company because apart from investment psychology, knowledge of finance is also important. We hope that this work will be able to throw some light on the complex world of psychology and investment. 

I give special thanks to my younger brother Abhay Srivastava and my friend BN Rahul for their valuable suggestions, without which such work would not have been possible.

 

Panchatantra Story : Goat, Priest, and Three Thugs

 Now These Thugs Active on Mumbai Roads

In our childhood, we read the stories of Panchatantra and the story of three thugs we remember. Exactly the same thing happened to me on 18^th June 2022 when I was driving my car on the busiest Mumbai roads.

I was going with my family on a weekend trip and the incident happened between Vashi to Thane Road. When I was about to reach Thane and traffic is moving inch by inch, suddenly a person come in front of my car and said that my car engine was sparking, I ignored it and continue to drive my vehicle. After a few meters, another person has come and said that your engine was sparking and it may catch fire. After a few meters, it happened the third time then I was concerned and took my car to the side of the road. Then another person has come and said that he has seen sparks on my car and the engine might catch fire and it is not good to drive the car. I opened the bonnet but no sign of any sparks was visible, I said I am not seeing anything but he said you are going with your family so should not take a risk and it is good to consult with a car mechanic.

On the other side of the road, there was a car garage and a mechanic will be available there. I went to the garage and asked a mechanic that my car was standing on the other side of the road and a few people said that they have seen sparks on my car. Immediately he come with me and analyze the engine and in technical terms told me that these are the faults. I asked how much it will cost then he told me that manager will tell me the amount. I discuss this with the manager on a call and he said that the total maintenance charges will be INR 12,578.

Then I have a doubt that how quickly he calculated the exact amount. The mechanic asked should I start working, I said “Stop” and closed the bonnet. Suddenly, the Panchatantra story of three thugs strikes in my mind. I said the mechanic to get lost from here, he said you are going to take a big risk, your car can catch fire any time. I said the car is mine and the risk is also mine you should not bother about that. Then he starts demanding 500 rupees, I have given him 100 rupees and said you have not done anything other than watch the engine, I am giving hundred rupees because I called you. So, your demand is unfair.

I started my car and run for the next 100 kilometers, and smoothly returned.

My lessons from such an incident:

• Do not believe when any stranger says something which immediately panics you.

• While driving does not allow any stranger to open the bonnet of your car.

• Always keep your mind cool under any adverse circumstances, you will always make the right decisions.