To maximise wealth, optimize brain

How many times in life have you purchased something impulsively and then regretted later? Similarly there have also been instances when we have dwelled over a decision for long and missed an opportunity. In first instance we were acting on our reflexes while in the second, we were acting on reflection. Well known financial journalist Jason Zweig has discussed these phenomena in detail in his book "Your Money, Your Brain."

Many a times we make purchases because we 'feel' it is the best. In rising market, most investors invest based on what they 'feel' will happen to the market. It is only when markets fall that investors start thinking and analyzing. Feeling is different from thinking.

Feeling has more to do with intuition. Thinking has more to do with analysis. To be a prudent investor, we need to work on both the brains. By being simply impulsive, we will behave erratically. On the other hand in trying to be over analytical we end up focusing on a single tree so much that we miss entire forest.

So when is it prudent to use gut feeling. Answer - "Trust." While investing if your mind says do not trust fund manager, do not trust directors of company or its ethics, best option is, not to invest in it. Your gut feelings can prove wrong also. Invariably that happens when we invest in sector funds. To gauge stocks of all companies purely based on a single gut feeling that the sector will do well is inviting disaster. Classic example of this is tech bubble. Historically investors had displayed similar behavior when railroad company stocks were issued in England around 1840-45. During tech boom investors blindly relied on their gut feeling that technology will change the way we live our lives. They blindly invested in all possible dot com companies. At this point in time their reflective (analytical) mind was not utilized at all. The way to deal with your mind at this point in time is to ask another question "why do I feel market will keep rising only?" Chances are you may be forced to think (analyze.)

Usually our reflexive (impulsive) system works on sights and sound. That is why most financial institutions use multicolored graphs (usually rising) in their advertisement. Once we see an advertisement with rising graph we are more likely to invest in it.

Coming to thinking mind, Zweig has stated that "once you are interested in a company. It's a good idea to let two weeks go by without even checking its share price." At the end of two week period start evaluating the company and its business without factoring its stock price. If you feel the business is still lucrative go ahead and purchase the stock. By following this you will not be buying into stock you will be buying into business. Stock prices keep changing constantly - throughout the day. Business hardly changes in a day. When we are buying stock we are ultimately buying into business. Buy a stock because you believe in its business and not because you like the stock price.

Rising stock prices often misguide us and lure us into investing. However better approach is to take decision in relation to our overall wealth. Assume sum total of our wealth is Rs 20 lakh. Now if one of the stock prices fell or rose by Rs 200 in a fortnight in all possibility we will panic if it falls and feel exuberant if it rises. However if we look at it in relation to our overall wealth, the movement is only of 0.01% i.e. Rs 200 / Rs 20,00,000. Feeling of panic and exuberance is due to our reflexive mind. However our analytical mind will tell us that either of the emotions is irrelevant because on larger realm of things, the loss or gain to our portfolio is negligible.

Gaurav Mashruwala

The author is a Certified Financial Planner. He may be reached at gmashruwala@gmail.com

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