Monday, June 23, 2008

Yeh na thi Hamaari Kismat ……

Yeh Na Thi Hamari Kismat, Ke wisaal-e-yaar, hota,
(It was not in my destiny, to be united with my lover)
Agar aur jeete rehete, Yahi Intezaar Hota
(If I had lived any more , I would still be waiting for it) …… Mirza Ghalib
Well what does Ghalib have to do with investing other than feeling poignant with the current state of the capital markets :-).

I have been struggling over the years to overcome one of the behavioural biases that I suffer while placing a order. In a fairly well traded stock there is enough liquidity and the impact cost of a trade is very small. So the market at a particular moment has the right price for the stock ( I m not talking about valuations here) based on the buyers and the sellers in the market.

The bias that I am referring to originates when I am buying a stock, I tend to put a price slightly lower than what the market is trading at to get a so called better deal. The implicit assumption by doing this is that one believes the market at that moment is inefficient and the actual price of the stock should be lower than what it is traded at.

Similarly when one is selling, one tends to place the sell order at a slightly higher price than where the stock is currently trading. Same implicit assumption that the market is inefficient however, this time the view is diametrically opposite that the market is paying less than what you believe is the fair price.

This is the dissonance where the market can’t be inefficient both ways. I have missed out on a lot of buying or selling opportunities and like Ghalib waited forever for the price to come :-).

6 comments:

Anonymous said...

I tend to do the same and appreciate the point you are making.

Pankaj

Mahendra Naik said...

That makes sense if you are a trader, but for a long term investment call it makes little difference, on the contrary you might miss out on good opportunities.

Banjo Smyth said...

Very true!

I think its only natural to want to get 'the best deal you can'. We as humans are always looking out for a bargin. . . no different when it comes to trading :)

Cheers Banjo

Ninad Kunder said...

Banjo smyth

You are right that we always want the best deal but then we tend to be penny wise and pound foolish and lose the bigger story.

I am trying to work towards not falling in this trap.

Mahendra

You are right in what you are stating and thats the point I was trying to make.

Cheers

Ninad

Inquisitive Stranger said...

Good to know that i was not the only one doing that, now i really have stopped trading completely cause of the loses i made, and although i have stopped trading the habbit placing it lower than the market price has not changed, makes more sense that when i am looking at the longer term i should avoid doing these small things and just buy if the price is right.

Ninad Kunder said...

Hi Inq Stranger

I have over the years worked on breaking thru this bias.

Cheers

Ninad