SEVEN DUMBEST INVESTMENT MISTAKES

By Scott Woolley

Emotions can be expensive, especially when you start making investing decisions with your gut instead of your brain. Fortunately, there are ways to avoid–or at least limit–the mistakes that we oh-so-human investors tend to make.

Daniel Kahneman won the Nobel prize in economics seven years ago for his work on how irrational humans systematically make mistakes. Since then, research in the field of behavioural finance has exploded.

Given the recent market turmoil what common, and costly, mistakes should investors be especially vigilant to avoid making today?

One is a direct result of the stock market plunge. People who bailed out of stocks after losing as much as half of their investments are now anxiously sitting out the market recovery, says Amy Barrett, a fee-only financial adviser and director of investments at Savant Capital.

Those people have “anchored” themselves to the value of the stock market at its trough, where they bailed out. They’re having a hard time accepting the fact that stocks might really be good values at their new, higher levels. In the past that behaviour has been a sure recipe for missing a market rebound, says Barrett.

“I’d like to shake these people and tell them to get out of their rut,” she says.

Emotional Investors’ Seven Dumbest Mistakes

Here are descriptions of the most common cognitive errors investors make–and some tips for getting your rational mind to override your potentially costly emotions.

WHAT IS OPEN OFFER ?

Open Offer: Perhaps the most above board of takeover bids, in which the bidder makes its intention known through an open advertisement, followed by letters of offer to shareholders, to buy the shares of the target company at a stated price, usually quite above the ruling market price. The bidder may thus acquire a sufficiently larger number of shares to have a controlling interest in he target company, paving the way for a merger.

What is Technical Analysis ? How is it different from Fundamental Analysis ?

The stock market used to be filled with technical analysts deciding what to buy and sell, until it was decided that their success rate is no better than chance. Now technical stock analysis is virtually non-existent.

Research and examination of the market and securities as it relates to their supply and demand in the marketplace. The technician uses charts and computer programs to identify and project price trends. The analysis includes studying price movements and trading volumes to determine patterns such as Head and Shoulder Formations and W Formations. Other indicators include support and resistance levels, and moving averages. In contrast to fundamental analysis, technical analysis does not consider a corporation’s financial data.

Technical analysts study trading histories to identify price trends in particular stocks, mutual funds, commodities, or options in specific market sectors or in the overall financial markets. They use their findings to predict probable, often short-term, trading patterns in the investments that they study. The speed (and advocates would say the accuracy) with which the analysts do their work depends on the development of increasingly sophisticated computer programs.

Technical Analysis supposes markets have memory.If so, past prices, or the current price momentum, can give an idea of the future price evolution. Technical Analysis is a tool to detect if a trend (and thus the investor’s behavior) will persist or break. It gives some results but can be deceptive as it relies mostly on graphic signals that are often intertwined, unclear or belated. It might become a source of representiveness heuristic (spotting patterns where there are none)

Technical analysis has become increasingly popular over the past several years, as more and more people believe that the historical performance of a stock is a strong indication of future performance. The use of past performance should come as no surprise. People using fundamental analysis have always looked at the past performance of companies by comparing fiscal data from previous quarters and years to determine future growth. The difference lies in the technical analyst’s belief that securities move according to very predictable trends and patterns. These trends continue until something happens to change the trend, and until this change occurs, price levels are predictable.

There are many instances of investors successfully trading a security using only their knowledge of the security’s chart, without even understanding what the company does. However, although technical analysis is a terrific tool, most agree it is much more effective when used in combination with fundamental analysis.

Fundamental Analysis

Fundamental analysis looks at a share’s market price in light of the company’s underlying business proposition and financial situation. It involves making both quantitative and qualitative judgments about a company. Fundamental analysis can be contrasted with ‘technical analysis’, which seeks to make judgements about the performance of a share based solely on its historic price behavior and without reference to the underlying business, the sector it’s in, or the economy as a whole. This is done by tracking and charting the companies stock price, volume of shares traded day to day, both on the company itself and also on its competitors. In this way investors hope to build up a picture of future price movements.

THE STOCK i BUY goes Down !!!

Most people think that after they buy a stock, that stock tends to move down rather than moving up. This always anticipates them to think before purchasing any stock or share that they are likely to loose money in a script invested in.

I have heard people say that luck & patience plays a very important role for Stock Market players and Investors. This is very true, irrespective if the concerned person is a trader or a investor. But, one should also remember that thinking positive for the money invested in any investment actually tends to give huge profits.

In other words, a Short term trader should start thinking that after purchasing say a Stock named “A”(Always invest after studding the company fundamentally personally), the price of the Stock should easily increase by 100% in Short term rather than thinking what will happen if it manages to go down. This is what most of the successful Investors till date have followed and earned huge profits over the time.

It is very important to have positive beliefs & attitudes. This is not something that I say and use, but this should be rule followed by all the traders and investors. Warren Buffett quoted “I always knew I was going to be rich. I don’t think I ever doubted it for a minute “.

This statement clearly states that Buffett wanted to be rich, and his mind us always thinking about being rich, being rich, being rich, being rich all the time. Our subconscious minds control most of our behavior, and when you have such strong conviction of being rich, it is difficult not to be rich eventually.

Your thinking should note be “That whenever I purchase a script, I dream of it to be a Multibagger.” instead your thinking should be “That whenever I purchase a script, I Believed it to be a Multibagger.”

There’s no harm in thinking that the investment you made in quality stocks will fetch very good returns, In-fact this shall actually help you to earn more in the Long run, this is worth a try..

DIFFERENCE BETWEEN TRADING AND INVESTING

A Large number of people are confused with what is trading and what is Investing. Investing on one hand is like buying a asset (a bunch of stocks is Stock market) and holding it for a long time say 10 or more years.

Many Investors buy stocks for long run and then sell them off in huge profit. Some big investors such as Warren Buffet have made more money in Long Term Investing or Investing rather that in Trading (Intraday).

Trading on the other hand it like buy a stocks for 2-4 Days or Intraday trading. In these volatile markets its very difficult to make good profits in Intraday trading, some traders intenend to buy stocks for short term and then sell them off in profits

WHAT IS DMA (SIMPLE MOVING AVERAGE) IN STOCK MARKET ?

Simple moving average or DMA  frequently used in technical analysis showing the average value of a security’s price over a set period. Moving averages are generally used to measure momentum and define areas of possible support and resistance.

Stocks trading above its 30,50,150 or 200 DMA are considered as those stocks that are above their resistance and are likely to go up, on the other hand Stocks trading below their 30,50,150 or 200 DMA considered as those stocks that are below their support levels and are likely to come down.

NOTE: This is not only a single factor that should be taken into account while purchasing or selling a stock, it largely depends on the market conditions.

WHAT IS OPEN INTEREST ?

Meaning

Open Interest also know as OI, is the total number of options and futures contracts that are not closed on a particular day. As you might be aware of volume in a particular stock in equity market, option trading involves the creation of a new option contract when a trade is placed. Open interest will tell you the total number of option contracts that are currently open.

Open Interest is mostly used to confirm a trend for a particular futures contract, For eg, lets look at Reliance 1000 May CALL, the open interest might tell us that there have been 5 options open in the month of May, a trader might then wonder does this refer to the number of contracts bought or sold.

Working
 

When a trader buy’s or sell’s an option, the transaction needs to be entered as either an opening or a closing transaction. If he buy’s 5 RELIANCE May 1000 CALL, he is buying the calls to ‘open’, i.e he is opening his position in a futures contract, which causes the Open interest to rise by 5, and then after sometime(within) the month he decides to sell his contract i.e close his position in a particular contract, then he is causing the open interest to go down by 5.

Open interest applies primarily to the futures market, it helps the measure the flow of money into the futures Market. For each seller of a futures contract (eg RELIANCE 1000 CALL) there must be a buyer of that contract. Thus a seller and a buyer combine to create only one contract.

A rise in open interest in a futures contract along with its price indicates bullishness, which means investors are creating long positions and vice versa.

The open interest position that is reported each day represents the increase or decrease in the number of contracts for that day, and it is shown as a positive or negative number.

Advantages of monitoring Open Interest

Changes in the Open Interst as mentioned earlier can help a trader interpret the future trend of a particular contract.

Open Interest RISING -> Indicates that the present trend (up, down, flat) will continue

Open Interest FALLING-> Indicates that the prest trend(up, down, flat) is likely to change or is coming to and end

Contract Price	Open Interest (%)	Future Trend(predicts)
Rising	Rising	The Contract is likely to trade strong in the coming days
Rising	Falling	The Contract is likely to see some downside in the coming days
Falling	Rising	The Contract should not be entered as of now
Falling	Falling	The Contract can be entered, as its likely to go up