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Money is sweeter than honey. Especially when it is your money. But have you ever given thought as to how you behave with that darling thing of yours? Well...... there is a fresh and nascent field called behavioral finance which attempts to understand and analyze the principles on which most human beings act while dealing with their money. A very important focus is on stocks that people buy, sell and hold since this is the arena where the maximum amount of decisional hesitations and blunders are witnessed. Too academic and pundit-like - do I hear you say? Not quite..... since some of these principles can help you assess your psychology while trading in equities and consequently help to avoid pitfalls that propel you to take wrong decisions and consequently make you lose money, or else abstain you from booking gains.

To start with, one should know that there are principally two elements that drive you to take any decision regarding any investment - the first is greed and the second is fear. While the first prompts you to enter the market, the latter compels you to exit the same. But what is most important is how to time your entry and exit so as to maximize your gains or minimize your losses. And there lies the problem. How to understand that optimum time, and more importantly how to identify as to whether you are deceiving yourself in spotting the right time? While a detailed discussion of the same would run into pages, here are a few tips to know how.

First, you must identify your financial blind spot. This is the arena where you go wrong the most. Now these could be quite a few. For example, your threshold for loss. This literally means your unwillingness to take a hit/loss even when the same is very obvious. You keep postponing to sell a diving stock just because you do not want to accept that you will incur a loss. What happens in the process is that, the value of your stock whittles down and leaves your purse thinner on a latter day. The remedy lies in detaching yourself from the situation and probing what you would have done as an independent person if you did not have a position in that stock. Another way could be to reframe the query as to whether would you like to enter the counter at that price again.  If  'no' is your answer, then 'yes' is what you should say on selling the same.

The next is the element of fear. A lot of people book their gains too early or make an exit otherwise, on apprehensions that they will lose money if they don't. The key solution to this is not getting caught in the mass mania. Also you should try to assess your risk and return appetite. How much of loss can you sleep with in the night, and how much of gains would leave you satisfied. Try to get these numbers right and then execute your order.

There is another principle regarding behavioral finance pertaining to stocks. That is, the element of passivity. Never hesitate to act. A very frequent tendency is to stay away from your stocks, just because you do not have any clue as to what to do with them. Leaving things will definitely not help, since the market always moves. If you don't, you will be left behind. If you have a portfolio which is not showing any movement, don't become a pseudo value-investor! Ask experts, see the news, hunt for the corporate developments on its part and then take a decision. If there is not significant growth that the company has in the future, sell it and invest in some happening and sound company.

The last but one tip - do not buy penny cheap stocks. They are likely to stay like that for the good part of the year. And next, do not let your ego influence your buying. It is not necessary that you should only buy the likes of Infosys, Wipro or Dr Reddy's. These are costly scrips and if they don't suit your wallet, stay away from them. Instead move to some moderately priced stocks with good fundamentals.

And finally, don't give over attention to your investments. Don't get dazed with information coming from all corners about your stock. Rely on information from two or three good sources, and base your decision on them. If you go to too many of them, it is like going to three or more lawyers or doctors for the same problem. And you well know the outcome!

Subho Datta

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