Patience pays in stock market investments

How many times have we looked at others and thought to add one of their strengths, traits, etc to our behaviour? That is inarguably human. Some say progress happens when we compare with others while some say that comparing ourselves with others makes us to lose the distinctiveness of what we actually are. There could be enough merits on both the sides of this argument. The trouble begins only when we restrict to imitate and not imbibe these better qualities of those admired.

Similarly, in investing, when we start to copy another successful investor without knowing why and how they became successful the results may not be as desired, always. This is because despite an attractive investment philosophy, if it doesn’t fit to our needs or requirements, then the outcome could be nothing short of a disaster.

In a survey published in 1989, economists Robert Shiller and John Pound found that one in three individual investors said that they recently bought a stock because a friend or someone else other than a financial professional talked with them about it. Surprisingly, a tenth of the portfolio managers said the same thing. This ratio goes further high of a stock they bought had higher returns where 50 per cent of the individuals and 30 per cent of the professional investors admitted buying partly because a friend or other non-professional had discussed it with them. These are very shocking revelations and give us an insight into how our investment behaviour is driven by various biases.

In recent times, we could’ve witnessed this in Hyderabad where at any family gathering or functions, the topics generally veer towards the real estate scene and people have given positive reviews about the general uptrend in the region. This has rubbed to further spread of this good news among others and thus creating an overall buoyancy among the investing crowd in the past one year or so.

This coincides with a lackluster return for the same period in equities and other asset classes. The current appreciation has been out of tandem and contrarian to the overall sectorial growth in the country with the implementation of GST (Goods and Service Tax) and RERA (Real Estate Regulatory Authority) on the backdrop of demonetisation. No, I’m not hinting at any conclusions on this sector in this region but just wanted to draw your attention on how the news spreads.

A new data released last week by Riskalyze, a firm that provides software to estimate investors’ risk tolerance who work with their financial advisors, has come up with some interesting aspects relating to the above observation. The firm analysed vast amounts of responses from over 458,000 clients of about 22,000 advisors to arrive at state-by-state (regions in the US) patterns. The firm thus scored the responses on a scale of 20 to 90 being minimum and maximum willingness to take risk.

Though, the state ranking of risk tolerance of the respondents is immaterial to our discussion, the highlight is the interconnectedness of these respondents in terms of the vicinity. The fascinating inferences from this study makes us to conclude that investors tend to be more willing to take risks when their neighbors are and less likely when those who are timid. It means that risk taking is not just an ingrained quality but could also be contagious.

Aaron Klein, the chief executive of Riskalyze says, “I think these results illustrate how emotional contagion can be real and how much we’re affected by what our friends, families, neighbors and co-workers are thinking and feeling.” So, it’s not only important to ignore the noise while investing but it’s equally important to stick to our goals, risk tolerance and surround ourselves with like-minded people.

Hence, the significance of exhibiting patience, tolerance and emotions - all behavioural patterns - are critical to stock investing, has come to the fore by these studies. Hope everyone of us emulate these qualities to get better out of stock investing to create riches to ourselves and reach our goals seamlessly.

- K Naresh Kumar
(The author is a co-founder of “Wealocity”, a wealth management firm and could be reached at knk@wealocity.com)