- This crowd mentality gives birth to speculation, which is uninformed and often not good for your investments.
- Tips are pieces of unverified information that claim to predict the movement of the price of a stock.
This applies to their investments as well.
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The Fear of Missing Out on a good stock at an attractive price is what worries most investors. While “good” and “attractive” are subjective terms, stocks with this tag manage to attract mass attention, and hence mass investment, pumping their prices up. People tend to form a herd mentality around a particular stock believing that is a “good” one and will give attractive returns in the near term.
WHAT IS THE HERD MENTALITY AND WHY IS IT HARMFUL TO YOUR INVESTMENTS?
Herd mentality describes how people can be influenced by peers into doing something that is being done by a lot of people, such as following a fashion trend, adopting a certain opinion on things, or in our case, investing into the stock of a company. This crowd mentality gives birth to speculation, which is uninformed and often not good for your investments.
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While the temptation to dip your toes in the running water is real, he adds that one must resist that temptation by reminding themselves that it took them 22-25 years of their life to save their first hard-earned rupee. Hence it would be wise of them to spend some quality time researching before making their investments with this hard-earned savings.
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HOW TO AVOID THE CROWD AND THINK INDEPENDENTLY?
It may seem reassuring to invest your money in a stock that a lot of people are investing in, but it does not ensure that a majority of people cannot be wrong in their judgment of the company. To prevent yourself from falling into this trap and thinking independently, Mr. Dilip gave shares some valuable tricks to always keep in mind. He says, “While investing in stock, think like a “business-owner” planning to invest in another business. A prudent “business-owner” would evaluate the following 5 Ps before considering another business worthy of investing: Promoter quality, People running the business (management), Products/Services offered by the company, Pricing power and the Price of the stock. Only if you are certain about all the 5 Ps mentioned hereabove, you should consider the said stock for investing in it.
THE FOMO OF “TIPS”
Tips are pieces of unverified information that claim to predict the movement of the price of a stock. When people follow these “tips,” they almost usually invest their money into the recommended stock without putting in some amount of research about the company.
Mr. Dilip explains the risks attached with trading on tips. He says, “Movements in a particular stock can be affected by various reasons directly, indirectly, or in no way related to that company. Relevant corporate developments of a listed company are available on the respective stock exchange website before being released to any other agency or person/s. Any unpublished, price-sensitive information about a stock obtained through an illegitimate source, can be categorized as insider information (which is illegal) or utterly unreliable. Either way, it is going to invite trouble and not. -specific developments or government policies that would affect the specific stock’s fortunes can be obtained from the public domain. Market sentiments that can affect any stock, can be sensed and understood as it is published, debated, and deliberated on all platforms.” He adds that if an investor is aware of the news buzzing around the stock, he/she will not require any outsider information on what to do with the stock.
SO WHERE TO INVEST YOUR MONEY?
When asked about the safest funds to invest money in, he says that asset allocator funds, where the fund manager has the discretion to switch from one asset to another based on the opportunities and dynamics of the market can be a smart and efficient route to build wealth.