{"id":366,"date":"2021-12-31T12:00:00","date_gmt":"2021-12-31T06:30:00","guid":{"rendered":"https:\/\/www.smevalueadvisors.com\/blog\/?p=366"},"modified":"2022-01-31T16:19:43","modified_gmt":"2022-01-31T10:49:43","slug":"value-investing-and-behavioral-finance-by-parag-parikh","status":"publish","type":"post","link":"https:\/\/www.smevalueadvisors.com\/blog\/index.php\/value-investing-and-behavioral-finance-by-parag-parikh\/","title":{"rendered":"Value Investing and Behavioral Finance by Parag Parikh"},"content":{"rendered":"\n

The concept of value investing<\/a> is well-known\/widely discussed and a preferred investing strategy for many investors. Value investing is rooted in the difference between the price and value of businesses. It is also a form of strategy that does not work on impulsive trading tips<\/a>.\u00a0<\/p>\n\n\n\n

\u201cValue Investing and Behavioral Finance\u201d by Parag Parikh, sheds light on the relationship between \u2018Value Investing\u2019 and \u2018Behavioral Finance\u2019. In a way, he is communicating that value investing opportunities are the product of behavioral aspects of market participants. Some of the learnings from the book are:<\/p>\n\n\n\n

Practice delayed gratification<\/strong><\/h4>\n\n\n\n

Value investors practice delayed gratification<\/a>. They reflect patience, remain steadfast on fundamentals, exercise significant discipline and emotional control on their investment matters. They are comfortable waiting for months and years for the right investment opportunities and having invested, they watch their investments bear fruits over a long time.<\/p>\n\n\n\n

The fact of the matter is that investing is simple, but the industry has made it complicated. In the quest for instant gratification, finance professionals seem to have woven a web of complexity to confuse the investors.\u00a0<\/p>\n\n\n\n

There is no \u2018easy money\u2019<\/strong><\/h4>\n\n\n\n

Markets are most dangerous when making money in the market seems to be the easiest. A classic example is the IPO frenzy<\/a> that has gripped investors in 2021. Retail investors have been participating in these IPOs in large numbers to make instant money on listing gains. However, IPOs are against the investor\u2019s interest, as they are mostly offered to investors when they are willing to pay a higher and outrageous valuation in boom times. Value is found in the bear markets and IPOs are the product of the bull market. <\/p>\n\n\n\n

Be cautious in a crowd<\/strong><\/h4>\n\n\n\n

When investors, politicians, academicians, market pundits, investment bankers, stockbrokers, analysts, company managements, foreign institutional investors, mutual fund managers all are optimistic, be cautious. <\/p>\n\n\n\n

Crowd psychology, when subject to excessive fear and greed, results in bull and bear phases from time to time. One needs to be a spectator of this phenomenon and jump to take advantage as and when the opportunity arises. As Warren Buffett said, \u201cBecome greedy when others are fearful and become fearful when others are greedy\u201d. Value investing is a kind of contrarian approach to investing<\/a>. This calls for not only a strong mind but a strong heart to enable one not to be swayed away by emotions.<\/p>\n\n\n\n

Market success is based on knowledge<\/strong><\/h4>\n\n\n\n

Investing becomes risky when it is based on market fancy; heard and without understanding. In the stock market<\/a>, a small percentage of people end up being successful in the long run, whereas the majority of people, in spite of being successful in the short run, end up losers in the long run. Learn continuously. Build knowledge. Let your knowledge and experience compound over time.<\/p>\n\n\n\n

Know the difference between good business and a good investment<\/strong><\/h4>\n\n\n\n

Acquisition price determines your returns. Paying too much on speculative\/cooked stories is foolish; buying at a low price reduces the risk and improves the chances of higher returns. One has to differentiate between a good stock and a good investment. A good business bought expensively is a bad investment. As Warren Buffett said, \u201cObjective is to buy great businesses at a great price\u201d.<\/p>\n\n\n\n

At some point, the bubble bursts<\/strong><\/h4>\n\n\n\n

Every new bubble has a new story justifying how \u2018this time is different\u2019 from the past bubble. However, the excesses are the same and, after every excess, there is contraction. Howard Marks of Oaktree Capital has written a wonderful book on the subject \u201cMastering the market cycles\u201d.<\/p>\n\n\n\n

The book also carries some interesting quotes from finance experts. Some of them are:<\/p>\n\n\n\n