Psychology

Stock Picking is over-rated, Psychology is under-rated

Almost every stock market participant wants to know the answer to one question – which stock to buy?

A lot of people think – “If someone gives me a few stock names which will do well in the future, I will be rich”

But is this really true? Can you take a stock recommendation from someone and get rich in the stock market?

The answer is no.

Stock Picking skills are highly over-rated. It is market psychology which is under-rated.

Stock market investing or trading is 80% psychology. Fine tuning your mind is the key to success. Everything else is just 20%.

Buying a future 100x stock is easy, Holding it is very difficult

Let us say, I told you about Bajaj Finance 10 years ago when the stock price was just about ₹ 70 rupees. Today it is ₹ 7500.

The stock has gone up more than 100 times in the last 10 years.

In other words, if you had invested 50,000 rupees in Bajaj Finance exactly 10 years ago – it would be more than 50 lakhs today.

But is investing THAT simple?

If you had invested 50k back then, would you still be holding all the shares today?

When the value of your investment doubles, you start thinking if you should book profit and take your money out.

Some people take their initial investment out, when the stock doubles. So, when your 50,000 Bajaj Finance investment went to ₹ 1 lakh, you sold half your shares and kept the remaining free shares ‘forever’.

10 years later, you would have 25 lakhs, instead of 50 lakhs.

This is assuming you kept the remaining shares ‘forever’ because as the value keeps increasing – it begins to get uncomfortable to hold a stock which outperforms your other investments by a huge margin.

Think of it like this. Let us say, you have a portfolio of 10 stocks and you have invested 50,000 in each company.

After 5 years you see, one stock has gone up 10 times – whereas the value of other 9 stocks has only doubled.

It would be 5 lakhs in one stock and all other 9 stocks in the portfolio are valued at 9 lakhs.

In other words, the total value of your portfolio is 14 lakhs – out of which 5 lakhs is invested in one company. More than 30% allocation to one stock. This will get uncomfortable too.

These are some of the many reasons why it’s great to read WhatsApp forwards which say a stock has gone up 100 times in 10 years. But it is very difficult to hold it in the portfolio for a long period of time.

This is also the reason why Rakesh Jhunjhunwala has become the ‘big bull’. The share price of Titan has gone up more than 600 times from the time he first bought it – he continues to hold those shares.

Titan is nearly 50% of his portfolio value even today.

This is just one of the many psychological aspects of stock market investing or trading.

On our website, we have several articles on psychology. Do read them. It will prove to be invaluable in your journey in becoming a successful investor or trader.

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