5 timeless lessons from Parag Parikh's 'Stocks to Riches' on investor behaviour
First published in October 2005, Parag Parikh's ageless book, 'Stocks to Riches: Insights On Investor Behaviour', still remains a crucial read for both aspirational equity investors and investment professionals alike.
Parag Parikh was a well renowned visionary investor in India. He was also a behavioural finance professional, author, and the founder of the Parag Parikh Financial Advisory Services (PPFAS) mutual fund. He was admired in the market circles for his deep and intense insights on human psychology and investing.
Not only this he was an ardent follower of Warren Buffett and advocated long term value investing. His legacy lives on through his work and writings and the immense success of PPFAS mutual fund, which continues to uphold his investment philosophy.
His book focuses on blending behavioural finance with practical equity market wisdom. It details how human psychology and biases influence investment decisions in the financial world.
With decades of experience in well planned value investing, Parikh draws on real-life examples to spread awareness among investors against unproductive and flawed investment behaviour.
Here are five core insights from the book that continue to hold immense value even in today's volatile markets:
Parikh throws light on loss aversion as a key emotional trap. 'The pain of losing is psychologically about twice as powerful as the pleasure of gaining,' he elaborates. The objective of writing this is to explain why investors often sell winning stocks early and hold on to losing ones. This instinctive fear distorts prudent decision making and rational judgement.
Hence, on the part of investors one should consistently review their portfolio objectively. Focus should be on building long term wealth and not on short term market fluctuations and swings. Wealth can only be built by maintaining calmness, long term vision and composure throughout the investment journey.
Mental accounting simply refers to treating money differently based on its origin or purpose according to Parikh. He strongly warns against this bias stating that, "People invest bonus money more recklessly than salary savings because they see it as a windfall." Such practices can push investors to poorly thought-out and erratic financial decisions.
Therefore, as an investor you should consolidate your funds and base investment decisions on clear financial goals. You should also be careful while spending apparently 'free' looking money such as a lottery win in a responsible manner as per your long term financial goals.
Many investors are reluctant to sell underperforming stocks because they have already put money into it and are on the losing end, due to this they are unable to take fair calls in a short period of time. To deal with the same challenge, Parikh urges readers to 'ignore the past and evaluate the present potential.'
This difficult to overcome behavioural bias keeps people tied to bad investments. The focus here is to exit loss making positions in stocks and mutual funds after carefully analysing their fundamentals.
The book quite intensely discusses the perils of following and going with the crowd. 'Investors are often influenced by what others are doing rather than what they should be doing,' Parikh writes. This can result in the creation of asset bubbles and consequently result in panic selling.
The dot com bubble of 2000-01 and the housing bubble of 2007-08 in the US are some of the most recent examples of the creation of asset bubbles. If not side-stepped efficiently, such bubbles can even result in epic wipe out of wealth. Parikh hence wants investors to carry out thorough research and avoid participating in such market bubbles to conserve wealth.
Parikh firmly supports long-term value investing. He argues that short-term market movements often reflect emotion, not logic. 'Markets are driven by greed and fear, not by fundamentals.'
This simply means that one should ignore temporary noise, market declines or fluctuations and invest in only those businesses that have sustainable value. This is the simplest way to build wealth on a long term basis.
The focus at all times is on the power of compounding and investing in those businesses that have the potential to showcase solid results and strong earnings compounding. For more details on the same you can refer to the official link of the book: PPFAS Knowledge Centre – Book Section
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Readers should consult a qualified financial advisor before making any investment decisions.
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