Value Investing And Behavioral Finance
Investor Behavior-Based Finance
The book's final chapter discusses Investor behaviour-based Finance. Just as an investor will benefit from researching a company before investing, a company will benefit from understanding its investor profile before making any major corporate finance decisions. For example, some investors may be long-term, while others are medium-term, and still, others are short-term. Some investors may be focused on the organisation, while others may be focused on the management. In contrast, still, others may be focused on the company's strategic direction, while still others may be focused solely on the financials. With this knowledge, a company can predict the impact of its decisions on its share price and decide whether such movement is acceptable.
Why Investor Behavior-Based Finance?
Financial markets are growing all over the world. Every country needs to attract capital for its growth, and what better route can there be than the stock markets? Borders are opening up and, with the use of new technologies such as the internet, information is available to all. Thus, financial markets have become very fluid. With the click of a button, transactions take place. This has led to the growth of an investing class hungry for investment opportunities to make a fast buck. The chaos in the market, along with the emotions of greed and fear, have created
investors who are very short-sighted and unpredictable.
It is essential to understand the behaviour of these investors so that we can manage their perceptions and, thereby, control the volatility in the stock prices due to their actions. They are the corporation's stakeholders, and understanding their behaviour will help the corporation manage its stock volatility.
What are the Benefits?
• Identifying and mapping investor behavior leads to better understanding of the investor base
• Being proactive leads to informed decisions
• Increase faith and trust with investors
• Transparency leads to investor-friendly strategies
• Make stock price less volatile
• Manage investor perceptions
• Create better understanding of the company
• Manage irrational behavior of investors
• Completes the missing link with employees, customers and Suppliers
Investors' emotions and behaviour heavily influence the field of equity investing. Greed and fear are the two primary emotions that drive investors. Understanding these emotions is essential for becoming a successful investor. When making investment decisions, an investor employs a variety of heuristics. Some of them may be explicit, while others may be implicit. Some may be beneficial, while others may be harmful. They will become a better investor if they know the heuristics that they employ. This is where this book comes in handy.