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Tuesday, 12 October 2010

Don't follow your heart in the market

IT'S A well-known fact that investors love "hot" stocks.

They're always interested in learning about the latest market sentiments, which companies other investors are putting their money on, and chasing stocks that are on the upswing.

But following the market is one of the worst ways to make investment decisions, experts say. Investors miss prime buying opportunities and lose out on good returns, especially if they focus only on the short term.

"Value in the long run is determined by (company) fundamentals, while short-term gyrations reflect market participants' psychological weaknesses, such as herding," Georgetown University accounting and finance professor Prem Jain wrote in his latest book, Buffett Beyond Value: Why Warren Buffett Looks To Growth And Management When Investing.

"Knowledge is the best antidote to making wrong decisions," he said.

Such knowledge applies on a variety of fronts: understanding market psychology, examining the intrinsic value of a stock, and identifying your own buying and selling patterns.

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