The same value-conscious shopper feels more comfortable entering the financial markets when markets are at their highs rather than at the lows.
We are now well into the festival season. In normal times the celebratory environment would be visible, through the familiar sights and sounds associated with it. Elaborate decorations, , the colours and fragrances of flowers decked over homes, vehicles, shops, roads, as well as the cacophony of sounds, loud yet welcome during this time.
This time around though, things are different. The colours, the sounds, the people: they are missing! It has been more than seven months now, this new way of living, with lesser physical contact, masks replacing sun-glasses, sanitizers gaining primacy over deodorant and the thermal gun more ubiquitous than the metal detector.
But one thing hasn’t changed much and that is us waiting with bated breath for the sale season. Normally, by this time, we would be shopping with a frenzy, buying clothes, home items, gifts, even new capital goods, having patiently waited for the “festival discount.” Offline or online, there is something about discount sales that get us going. We are inherently deal-seekers, and good deals get us all pumped up. We plan in advance, create elaborate wish-lists, and watch multiple sites to seek the best possible price. We also discern value well, since we look at and compare the features and benefits, after going through the details of the offers well, and choose what gives us the best overall value for our money.
This behaviour of ours is not restricted to smaller-ticket purchases such as clothes and accessories. We equally, if not more, eagerly anticipate sales on our desired car, phone, smart TV and even dream house. We do the math repeatedly and well, including planning for the number of years we intend to keep the purchase for and the replacement costs, whether to purchase cash-down, or on EMIs, and while we are conscious of the ticking clock, we do not rush into a decision before we are sure. Lastly, while we rarely also end up splurging on something that we do not necessarily need, we in general prioritize well, and allocate our monies during Sale Season smartly, to get us the best bang for the buck, while keeping our needs well in mind.
We are now well into the festival season. In normal times the celebratory environment would be visible, through the familiar sights and sounds associated with it. Elaborate decorations, , the colours and fragrances of flowers decked over homes, vehicles, shops, roads, as well as the cacophony of sounds, loud yet welcome during this time.
This time around though, things are different. The colours, the sounds, the people: they are missing! It has been more than seven months now, this new way of living, with lesser physical contact, masks replacing sun-glasses, sanitizers gaining primacy over deodorant and the thermal gun more ubiquitous than the metal detector.
But one thing hasn’t changed much and that is us waiting with bated breath for the sale season. Normally, by this time, we would be shopping with a frenzy, buying clothes, home items, gifts, even new capital goods, having patiently waited for the “festival discount.” Offline or online, there is something about discount sales that get us going. We are inherently deal-seekers, and good deals get us all pumped up. We plan in advance, create elaborate wish-lists, and watch multiple sites to seek the best possible price. We also discern value well, since we look at and compare the features and benefits, after going through the details of the offers well, and choose what gives us the best overall value for our money.
This behaviour of ours is not restricted to smaller-ticket purchases such as clothes and accessories. We equally, if not more, eagerly anticipate sales on our desired car, phone, smart TV and even dream house. We do the math repeatedly and well, including planning for the number of years we intend to keep the purchase for and the replacement costs, whether to purchase cash-down, or on EMIs, and while we are conscious of the ticking clock, we do not rush into a decision before we are sure. Lastly, while we rarely also end up splurging on something that we do not necessarily need, we in general prioritize well, and allocate our monies during Sale Season smartly, to get us the best bang for the buck, while keeping our needs well in mind.
Not discount shopping in the markets
All these actions speak very well of us as shoppers, since they are rational, explainable logically. Unfortunately, the same cannot be said of our actions when it comes to our investments in the markets. The stakes are similar – we are using our incomes to purchase assets which are cheaper than their perceived value. So why is it different? Why does the same shopper as an investor feel more comfortable entering the financial markets when markets are at their highs rather than at lows? And why the panic to sell assets at a loss when there is a market crash, rather than buying more?
Of course, there can be many arguments to justify this behaviour.
-Financial assets are more transparent, so value is seen every minute. And so is the volatility.
-Our ability to identify value in real goods is better vs that in financial assets.
-People are generally risk-averse and hence “visible” losses cause them to panic.
-Financial assets are in general far more liquid, so the exit barriers are minimal.
All of these reasons are valid, but still don’t explain why the same person behaves differently when purchasing a real good/service vs a financial asset. After all, even cars and phones depreciate the moment one purchases them, and many a times one even sees better prices available after the purchase is done. Of course, it creates dissonance, but we don’t rush to offload our purchases, and that’s because we know that the value of what we have purchased is higher than the price we paid for it!
If we pause to think a bit, every one of us can learn to become better managers of our money if we can just learn from our own behaviour during Sales!
All these actions speak very well of us as shoppers, since they are rational, explainable logically. Unfortunately, the same cannot be said of our actions when it comes to our investments in the markets. The stakes are similar – we are using our incomes to purchase assets which are cheaper than their perceived value. So why is it different? Why does the same shopper as an investor feel more comfortable entering the financial markets when markets are at their highs rather than at lows? And why the panic to sell assets at a loss when there is a market crash, rather than buying more?
Of course, there can be many arguments to justify this behaviour.
-Financial assets are more transparent, so value is seen every minute. And so is the volatility.
-Our ability to identify value in real goods is better vs that in financial assets.
-People are generally risk-averse and hence “visible” losses cause them to panic.
-Financial assets are in general far more liquid, so the exit barriers are minimal.
All of these reasons are valid, but still don’t explain why the same person behaves differently when purchasing a real good/service vs a financial asset. After all, even cars and phones depreciate the moment one purchases them, and many a times one even sees better prices available after the purchase is done. Of course, it creates dissonance, but we don’t rush to offload our purchases, and that’s because we know that the value of what we have purchased is higher than the price we paid for it!
If we pause to think a bit, every one of us can learn to become better managers of our money if we can just learn from our own behaviour during Sales!
Be clear about your needs and which financial asset will fit your need well
Have a plan to prioritize what comes first. And be clear about the horizon of purchase and what therefore would be right asset class in terms of fit.
Do your research well on the price and the underlying Value
Keep your wish-list ready. Do your math and be clear as to what would be a good “Sale price” versus the long-term value you are getting.
Wait patiently for the “Sale” price to come
Don’t jump in just because you feel everyone else has and fear that “stocks will get over.” Just like the real world, even in the financial markets, “Sales” come frequently.
If prices fall further, don’t panic; instead, load up
The best way to prevent panic sales during a crash is to go back and do two checks – one, whether the underlying value is intact and two, is the time horizon of purchase still suitable. If answers to both are yes, then treat this as a bonus Sale if your asset allocation permits.
Have a plan to prioritize what comes first. And be clear about the horizon of purchase and what therefore would be right asset class in terms of fit.
Do your research well on the price and the underlying Value
Keep your wish-list ready. Do your math and be clear as to what would be a good “Sale price” versus the long-term value you are getting.
Wait patiently for the “Sale” price to come
Don’t jump in just because you feel everyone else has and fear that “stocks will get over.” Just like the real world, even in the financial markets, “Sales” come frequently.
If prices fall further, don’t panic; instead, load up
The best way to prevent panic sales during a crash is to go back and do two checks – one, whether the underlying value is intact and two, is the time horizon of purchase still suitable. If answers to both are yes, then treat this as a bonus Sale if your asset allocation permits.
I know this is easier said than done, but what can be more credible than our own right behaviours to correct our wrong actions? And in this case you don’t even have the excuse that “his temperament is better than mine!” So next time a “Sale” hits the financial markets, don’t panic or sit on the side lines. Rather see it as a “lightning sale” and an opportunity to purchase some good long-term assets.
Happy Investing
Source: Moneycontrol.com
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