Trading Psychology in 60 seconds – Regret Avoidance

A lot of trading psychology has been learnt through meticulous research and study, by people such as Amos Tversky and Daniel Kahneman and more recently, by Brad O’Dean. If we skim the cream off the top of their studies we find that investors and traders routinely avoid selling losers to avoid feelings of regret and WHEN they do this so that they often end up causing themselves greater financial harm and psychological distress.

Ergo, here we are looking at the CTD chart in July 2020 (CTD is listed on the ASX). It’s been on a downtrend for two years falling from $33 to $12 today. All the research tells us that if we were a buyer at $30 and are still holder today, we are doing so for several reasons. Either we are being duped into holding on by someone else, such as a financial advisor or, more likely by our internal psychology.

We avoid selling now because:

We cannot face taking the financial hit to our account.
Because we cannot face up to the fact that we are wrong. We bought at the top and now have to sell at what looks like the bottom.
We avoid selling because we hold out hope that the stock will once again trade back at $30
There is a financial penalty that regret avoidance has on our account. We may be holding onto a losing position for years. The position may even get worse and we may end up losing even more money. We engage in wishful thinking about exiting at a higher price and once we let do that, we become psychologically weakened when it comes to all future investments/trades. We lose out due to opportunity cost – that is the cost of missing out on other winning trades and being unable to use the money tied up in CTD because we avoid cutting our losses, freeing that money up and playing for better position elsewhere in the market.

You can avoid being a regret avoider by doing the following: accept that its ok to be wrong, accept that you will be wrong, accept that there is a financial penalty for being wrong, accept that the best financial penalty for being wrong is a cheap financial penalty, have a trading plan which identifies risk and a price point which identifies to you that you are wrong while at the same time, allows you to exit with a small financial penalty.

Investing in Agriculture Land Near Mumbai

A number of urban investors are investing in agricultural land. As an agricultural land plot can guarantee a good return in the long term. Investing in farmland in India has many benefits, you can use it for the purpose of farming or it can serve your dream of a weekend getaway. Buyer of the farmland has the opportunity of farming by himself or give this farm on lease to someone.

India is the second most populated country in the world and with a smaller land area as compared to China or the U.S. In such a condition agriculture land has become extremely valuable and difficult to acquire in places near to metropolitan cities like Mumbai, Delhi. From middle class to high net worth investors all are looking to invest in land and considering it a most reliable asset class. Apart from this, the profit made from selling the farm is tax-free.

Let’s look at the advantages of owning farmland:

Agriculture land can create good wealth in long term.
It is a low-risk investment
The income that you will earn through this agricultural land will be free from tax.
Today there is a gap between demand and supply across the country, which leads to the increase in agriculture commodities prices.
It is a great investment to keep pace with inflation.
Now let’s understand how investing in farmland can generate returns:

1) Investors of agriculture land can make money from the cash flow from the crops that are harvested.

2) Land Appreciation: We know the land is a limited resource and the agriculture land has decreased due to the land development and urban sprawl which makes the agricultural land more valuable. Thus this situation makes agriculture land to increase in value which is eventually beneficial for the investors.

3) There are other ways to generate income on farmland if your farmland is next to the highway you can generate income through billboards placed on the land or through radio towers that are built on the land.

Investing in the land may not provide you with immediate returns but over a longer-term, the returns can be quite decent. Also, there is much less volatility in this asset class as compared to others.

Pali Hill Estates is one such organisation which helps city buyer of Mumbai to switch to the countryside. As realty prices in Mumbai and other cities are rising, people are shifting their farmland investment towards the edge of metropolitan areas.

To take an escape from hectic city life, people want a place where they can relax and enjoy. As Lonavala and Khandala are getting crowded and overpriced, Khopoli is an emerging destination near Mumbai with mountain and valley views. Agricultural land in Khopoli-Pali road offers a great scope of investment opportunities. It is well connected to Mumbai and Pune and is just a 1-hour drive from Mumbai.

Some buyers want to invest so they can do their own organic farming on weekends and some want to build their dream second home for holidays.

Investors must choose their farmland based on few parameters like location, water facility, land fertility, soil quality and budget.

Trading Psychology in 60 seconds – The Disposition effect

In the book called Reminiscences of a Stock Operator, Larry Livingston our hero of the story, committed what we now know as the disposition effect, when he held onto his position in cotton which showed him a loss, but sold his position in wheat which showed him a profit. He came to the conclusion that this was the worst speculative blunder that anyone could ever make in the market.

Consider shareholders in stock code ABC – down 25% in a day. How many of them will continue to hold? It is a tough call to ask anyone to sell a position which shows such a loss. Many holders will be carrying much larger losses because this thing has been at $4.40 12 months ago.

So what can you do?

First of all, you make yourself mindful of the disposition effect and with this in mind you establish investing or trading rules that are directly related to stopping you from finding yourself in this predicament.

We do this by not buying into downtrends for example. We focus on the economic fundamentals of not just the company but the broader economy in which we find ourselves. In a COVID 19 world, this would mean many people would be holding onto travel related stocks and suffering from the same effect – holding onto the Webjet’s in their portfolio, but offloading their ZIP or Afterpay shares which are showing them a profit.

You can take smaller position sizes as a general rule and work out a worst case scenario and see if and when this scenario unfolds, what impact it can have on your overall portfolio.

Maybe you limit yourself to only one stock per sector, such as one building company or one bank and so on, because we often see how bad news affecting one bank, always leads to contagion in other banks. But we are not your financial advisor. We don’t know what is best for you. But we suggest, making the worst speculative blunder that anyone could ever make in the market, is one blunder you should surely strive to avoid.