Stocks to Riches by Parag Parikh
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stocks to riches by Parag Parikh is a book on investing and focus more on behavioral finance it teaches many things about investment biases and emotional part about investing a must read for beginner in stock market.
Chapter 1 Investing
- investing is all about doing something to reap benefit in future.
- it means different things to different people there are many types of investment products.
- investing is a plan.
- good investing plan is adjusted according to individual and is diversified among different assets.
- trading and investing are different thing.
Action
- build your own investment plan according to your need and diversified asset.
Chapter 2 Investment strategy
- Investment strategy is the first issue that investors should consider. Investing is an act of faith, a willingness to postpone present consumption to save for the future.
- there are two types of return in stock market 1. fundamental 2. speculative return
- The inherent gambling instinct in a human being is responsible for the huge turnover in speculation.
- Long-term investing can be very rewarding if you buy the right company at the right price,
- A stock can decline significantly in the short run and yet give a decent long-term return,
- Short-term investing (speculation) can also be very rewarding if you are able to time the markets and take advantage of short-term volatility.
- Obvious prospects for physical growth in a business do not translate into obvious profits for investors.
Chapter 3 Three ways of Investing
- Intellectually difficult path - hard process for thinking like warren buffet.
- physically difficult path - required lot of hard work like Elon musk.
- emotional difficult path - hard process for managing emotion like equity investors.
Chapter 4 Introduction to Behavioral Finance
- most important part of the book start from here.
- The reality is that human beings make decisions not only with their minds but also with their emotion.
- decision = logic * emotion
- we do things emotionally and justify them logically.
- Behavioral finance explains. many of the mistake people make in the financial markets.
Chapter 5 Loss aversion and Sunk Cost fallacy
I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful” —Warren Buffet
- that is our fear of losing.
- that is our inability to forget money already spent.
- Loss Aversion - the pain of a loss is three times more than the pleasure of an equal amount of gain.
- Sunk Cost Fallacy _ increasing commitment to justify past actions because ego is tied to the commitment.
Impact of loss aversion and sunk cost fallacy
- Investors tend to prefer fixed income investments to stocks.
- Investors tend to take their profits very early.
- Investors take more risks when threatened with a loss.
- Investors tend to hold on to losers and sell winners.
- Tax Aversion. People are always wary of paying taxes.
- averaging a bad stock
- Government Spending on Unviable Projects
Chapter 6 Decision paralysis and endowment effect
- Status Quo Bias, that is our inability to make decisions.
- deciding not to take a decision is also a decision.
- Endowment Effect, that is the tendency to fall in love with what we own and thus resist change.
- we perceive that whatever belongs to us is more valuable than what belongs to others.
- never attach ego to your investment you can go wrong.
- Consider the opportunity costs.
- Don’t get married to your stocks.
- Understand that there is no free lunch.
Chapter 7 Mental Accounting
- We create mental accounts according to the quantity of the money and treat them differently.
- one of the most common and costly mistakes people make when dealing with money. It is the tendency to place different values to the same sum of money depending on how it has been acquired and the effort required to acquire it.
Chapter 8 Mental Heuristics
- The dictionary definition of the word heuristic refers to the process by which people reach conclusions, usually by trial and error.
- Availability heuristics: We are more likely to make judgements based on recent or easy to remember events rather than other similar but harder to recall instances.
- Representative heuristics: We assess the likelihood of an event by its similarity to other occurrences. A predominant bias associated with this is over reaction. In the stock markets, if the leaders report impressive performances, then all the stocks in that particular sector benefit.
- saliency heuristics: Individuals overreact to an unusual event assuming it to be a permanent trend. example panic after 911 on world trade center.
- Anchoring adjustment: investor tend to anchor a higher price of their stocks and adjust its value according to it.
- Herd mentality: making decision just because of social proof seeing other people doing same thing.
- Size bias people have difficulty to visualize compounding results.
- pattern recognition Human minds are not perfectly rational they tend to identify pattern and make decision on the basis of them.
Chapter 9 Mutual fund
- mutual funds are bushtit and it's not going to create you any wealth in long run because people who run them are capable, but their decision is heavily affected by heard.
Chapter 10 Stock Market bubble
- There's lot about stock market bubble and everyone has their own incentive adjusted to their own interest.
- In the case of the bull market, we need to know the source of the money and from where the money to fuel the boom is coming.
- In the case of a bear market, we must know the source of information and the actor playing on insider information to depress the price.
System thinking
A system is that which maintains its existence and functions as a whole through the interaction of its various part.
Reinforcing Feedback: when changes in the whole system return to amplify the original change.
Balancing Feedback: when changes in the whole system return to oppose the original change and so dampen the effect.
Chapter 11 Why One Must Invest
- the only way you will get rich is buying equity not renting your time.
- The rich create assets. The assets create income. From the income they create more assets.
- invest first in your financial literacy than on asset.