Red Flags while Investing

Investment Decision Hygiene :

Noise is an invisible enemy, and preventing the assault of an invisible enemy can yield only an invisible victory.

Given how much damage noise can cause, that invisible victory is nonetheless worth the battle.

Bias is an error we can often see and even explain. It is directional: that is why a nudge can limit the detrimental effects of a bias.

Bias is also often visible: that is why an observer can hope to diagnose biases in real time as a decision is being made.

Noise, on the other hand, is an unpredictable error that we cannot easily see or explain. That is why we often neglect it - even when it causes grave damage.

The goal is to prevent an unspecified range of potential errors before they occur.

When you wash your hands, you may not know precisely which germ you are avoiding - you just know that hand-washing is good prevention for a variety of germs.

Similarly, following the principles of decision hygiene means adopting techniques that reduce noise without ever knowing which underlying errors you are helping to avoid. Making investment decisions is an activity that is highly prone to Noise.

These are some decision hygiene methods to follow while Investing in the stock market -

If it looks too good to be true, it probably is

Dig deeper to find WHY the security is mispriced. Footnotes of financial results could be a good place to look at.

Data :

What information do you have that others may not be tracking?

Usually, newspaper or television news is accessible to everyone and has several biased / paid opinions.

Do your own research using raw factual data.

Do not catch a falling knife :

If a stock is losing momentum very quickly, it is better to stay on the sidelines than to invest in it thinking that it is an attractive bet.

Valuation bubbles :

Avoid overvalued companies.

The price-to-earnings measure when compared to the industry average gives you an idea of how overvalued a company is.

Our screener can help in scanning Red Flags before making any investment decision.

PFA some PE Red Flags for Indian stocks with a market cap of more than 75k as of 5th May 23.

Please check out our Screener for many such proprietary features- Click Here

About the Author :

Rohan Borawake is a SEBI Registered Investment Advisor and Finance Writer dedicated to providing valuable insights through his blogs and articles, catering to both everyday individuals and investors. For more of his content, follow him on LinkedIn by clicking the link - Rohan Borawake.

To gain a more profound understanding of quantitative analysis or witness its application in action, consider following Sabir Jana, the Head of Quantitative Research at Finsharpe, on LinkedIn. Click the provided link to connect with him on the platform- Sabir Jana.

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