Investors in Equity markets suffer from what I call “The Abhimanyu Factor”.
Abhimanyu in the Mahabharata was Arjuna’s son, who was an extraordinary warrior and the lone Pandava who had the unique expertise of penetrating a CHAKRA formation in the WAR with the Kauravas. However, his undoing was learning only half the trick, while he was adept at penetrating the formation, he did not know how to exit the formation, which leads to his ultimate death in the war.
Investors in Equity markets also suffer from a similar predicament. While they enter equity markets through stocks or mutual funds, seeing the uptrend in markets, they don’t quite know when to EXIT the market or book their profits. Some of the reasons for the same are:
1. Greed: When equity markets are doing well, Investors think that the next day equity will grow more than the previous day. GREED makes them stay on till the markets crash (quite like a Gambler in a roulette table).
2. Lack of Goal based Approach: If the Investor is just putting money into the market without any goal post or a plan, it is unlikely that they have any trigger to do any action like booking profits.
3. Regret Aversion: If the investment of the Investor is below his purchase price or at a loss, the investor chooses to stay invested irrespective of the fact whether that investment continues to be worthy of staying invested or otherwise. In behavioural finance, it is called Regret Aversion.
The only way to overcome this is to make a PLANNED investment, and part of the plan must define the duration of investment and manner of exit of the investments. This plan must also include conditions for an early exit, if any, from the said investment.
AFTER ALL, IF THE PURPOSE OF INVESTING IS TO MAKE A PROFIT, WHAT’S THE PURPOSE OF STAYING INVESTED LONG AFTER THE PROFITS HAVE COME AND GONE.