Prediction starts with everyday life.
Last time when you asked someone to give a specific answer, only to realize it took a second chance, moments later for a better response.
When did you have your breakfast?; answered “around 9”. Moments later they would correct saying precisely 10.
Jason Zweig in his Book “Your Money and Your Brain” mentioned – The Man with Two Brains, most people on questioning answer immediately. Given few more moments, they recall the exact answer.
When questioned something you immediately summon up your visual memory to the closest answer and then instantly adjust very easily.
Neuro Psychologist calls this process as, “anchoring and adjustment,” you tend to adjust moments later easily.
Weird for Wealth
Now! Coming to the stock market investment. Your Brains begin with prediction. Especially when the money is involved, or valuations are concerned you can’t resist prediction.
Your decision making starts first with prediction, “You have started a half battle lost.”
All the time your reflex triumphs cognitive reasoning. This is the main reason most of the traders are not successful in trading. The trader who gives enough time to their trades with minimal risk and does not look at the system all the time are more favorable.
Investors can’t refrain from looking at their investments, right from small investors to substantial investors, this human trait acts against their investments. Investors those who continuously look only at the business, their operations, profitability, sustainability; not engrossed with the market price are prone to succeed much faster than others.
Human brain reacts irrationally in short-term and rational in long-term, “Investors are human,” says Andrew Lo, a finance professor at the Massachusetts Institute of Technology. “Therefore, how the human brain works and why we react the way we do to various situations are critical for developing a better understanding of the common mistakes that typical investors make.”
The Prediction Addiction
Talking about Behavioural Finance, our brain acts between rewards and pleasure.
Behavioural finance establishes that this is the main reason behind why many traders can’t give up their trading activities even though they have not been making money.
No Pain, No Gain
Decision trending towards reward and pleasure, along with human psychology that only hard work gives your return been ingrained into our minds creates ripples of decision making which are not required at all.
Hard working makes us believe that more we trade and more money we are going to make, by doing nothing we are losing a lot of opportunities. Combined with the dopamine effect that, neurotransmitter, that helps brain controls the reward and pleasure centers leads to prediction addiction.
- ” With the current company I am going to make money, the sales are ever growing, and within ten years their sales will be 10X.”
- Nifty 50 target is 1000,00 in a decade from now.
- I am going to double my wealth in next two years.
Next time when you are making such statements remember that you are predicting in the stock market which never works.
The prediction does not stop with that alone; justification is the next step.
Predictions are justified and validated. Again, more than ourselves the environment we stay in is responsible for such a situation.
Blogs, Forums, Newspaper, Televisions Channels, Friends, Relatives, Financial Advisor all of them make predicting statements all the time.
If suggesting you to buy a stock and I tell you just to invest, your very next question would be, “What is the Target Price?”
Recently when Morgan Stanley made a Prediction, it was all over the news.
So now the real question comes how to make Wealth in The Stock Market?
Simple and easy ways to get over the prediction addiction and what it takes to make money in the stock market.
Making Money in Stock Market
Believing that you understand Three Most Important Pillars of Value Investing, the maximum amount you can lose in the stock market is the amount that you have invested.
That happens only when the business operations stop entirely.
[T]he Stock Market is voting machine in short-term and weighing machine in Long Term.
Short term mispricing should not be your concern, focusing on how business is performing and looking at it inside out the scuttlebutt way.
Mr. Market always gets you standing on your toes, avoid it, trust your Margin of Safety lessons and invest in stock market.
Let the market play its game in the short term, you take the profits in the long term.
When you are looking long term: look at how the sector is performing, study how other companies in the same industry are performing, research enough about the company and its performance, get to know who their customers are and what they are saying about the company.
Business should not wholly stop its operations. Any decision that companies take that can affect their service or the company seizes to exist or slow down should be continuously monitored.
Monitoring Business risk the scuttlebutt way ensure that you stay with the company you have invested and ensures that you don’t need to look at the price. Becuase now you know the value of the company.
To have an advantage of all other Moats, one should have a very good Financial Moat.
Toy ‘R’ Us is a classic example of this. They had numerous moats except for Financial Moat and that resulted closure of their business.
One of the main aspects of the financial moat is financial business prudence in business.
The nearest explanation is economic moat as mentioned below.
Over To You
Looking stock as a medium of owning a business rather than a commodity or instrument itself will change the way you look at the stock.
Getting involved into a more serious business of the company rather than looking at the price the whole day.
Come back here and tell us about the before-and-after. I bet you’ll have something to say!
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