Basics of Equity Investment by OwnFinance (Personal Finance & Investing)
Value investing
- Benjamin Graham, the author of the book ‘The Intelligent Investor’, is famously called the father of value investing. Many great investors have spoken about it as a philosophy they follow.
- The core idea of value investing is to buy shares at a price less than they should cost = buy undervalued shares.
There are challenges in value investing that make it difficult.
- One big challenge is the value trap. An investor may buy a stock that appears to be undervalued. But the value of the stock over time does not rise. It continues to seem undervalued. Eventually, it turns out that the stock was undervalued because the company behind it had major problems. Getting a stock at an undervalued price does not guarantee that the price will reach a ‘fair’ value some day.
- Another problem: overvalued for a long time. Investors might have to wait a long time for stocks to be available at attractive prices. Stocks can remain overvalued for long periods of time.
Some of the Important Terms for learning basics of Equity Investment are discussed below.
Recency bias:
Investors tend to give too much importance to events that have happened recently. This behaviour has it’s positives and negatives. It can lead to investors making highly biased and uninformed investment decisions.
Disposition effect:
Investors often tend to sell investments that are performing well to ‘book’ profits. This way, they often miss out on good returns in the future.
Hindsight bias: Investors analyze history and may feel something was obvious. “This had to happen”.
The reality is that most events are hard to predict. Investors should not punish themselves for not predicting something that seems obvious now.
Anchoring bias: Getting fixated on a price.
A stock was at Rs 100. Its price falls to Rs 95. Some investors might be tempted to buy it since it is Rs 5 cheaper. They are thinking about its Rs 100 price. But what if it is still overvalued, even at Rs 95?
Investors must analyse investments without letting the current price anchor their decision-making.
Funds with a lock-in
- Once invested, that amount is locked in for a few years. Usually, the lock-in ranges from 5 years to 10 years. Once an investor invests, the money is locked till the next opening window/maturity of the fund. It is very difficult to withdraw money before maturity because this money is invested in less-liquid investments like start-ups and unlisted companies.
- One example of this is tax-saver (ELSS) mutual funds. They have a minimum lock-in period of 3 years. Some investment options like venture capital, private equity, and alternative investment funds also have lock-in periods.