Past performance certainly does not guarantee future results, whether on a playground or in markets. Several elements can affect the performance of stocks or cricket teams.
The majority of players in England’s squad in 2019 are also in 2023, but their performance has tumbled, which may be because of players’ age, agility, etc.
Similarly, the performance of a portfolio also depends upon several headwinds such as interest rates, inflation, management’s intentions and ability to capitalize on opportunities, market growth, competition, etc.
In simple terms, the factors determining the performance in two different periods are never the same. So, investments based on past performance may not yield similar results in the future always.
This tendency to invest based on past performance is a behavioural bias commonly termed trend-chasing or extrapolation bias.
Many investors pursue stocks based solely on past performance, assuming these returns are achievable in the future. Yet, research indicates this strategy is unreliable, as historical gains often don’t foreshadow future success.Now the question arises how do you overcome this bias? First is education. Research empowers investors to grasp fundamental principles, gain a competitive edge, stay informed, and acknowledge and overcome their biases. This fosters independent thinking, helping them overcome two behavioral tendencies of chasing trends – fear of missing out or fear of joining a rally. Investors can maintain a clearer perspective on their market positions and make more rational decisions.
Earnings and share price returns of tech companies and housing companies were on an upsurge before the dot com bubble and housing market crash, respectively. Investors should assess the risks associated with trendy investments before investing in specific themes.
A simple diversified approach would act as a hedge in the falling markets. Diversification helps address both systematic and unsystematic risks, and prudent allocation towards the different categories of asset classes is much more likely to sail through the storms in the markets when you are struck with Black Swan events like these.
Investors should be cautious of peer influence and avoid making investments solely based on their suggestions or recommendations and should be aware of the “wisdom of the crowd” surrounding them before making an irrational decision that forces them to book losses in the future. If required, investors can use the help of certified professionals.
Avoiding this trend-chasing bias also leads to a different investing style- contra investing. This is a technique where contrarian investors may see opportunities in undervalued assets that others are selling, ultimately profiting when the market resumes. Further, quantitative analysis and techniques can also be used for investing without focusing on the noise of the herd.
Investors can also consider holding cash instead of blindly following trends to avoid potential disappointment. They need to be aware of methods to overcome trend-chasing bias and periodically rebalance their portfolios.
Just as in cricket, shifting investments from England’s 2019 squad to India’s 2023 squad for better returns, protection against downward risks, flexibility, and a well-thought-out strategy are key to success in financial markets
Technical Outlook:
CHART ATTACHED
The majority of Nifty stocks are on track for noteworthy gains so far this week, ending at 19,230.60, pushing the index 0.96 % higher.
As the Fed kept the rate unchanged, the global market rallied swiftly, followed by the Indian market.
Among Nifty participants, BPCL outperformed with a 7.93% gain, while M&M remained the top loser with a loss of 2.77% in a week.
Among sectors, Nifty Realty outshines with a 10.42% gain, while Nifty Auto ended marginally lower.
Technically, in the weekly chart, a Bullish inside candle is formed. While weekly RSI remains at 51. While on a daily chart, 50 DMA placed 19,450, acting as strong resistance. In the monthly expiry, on the call side, the maximum concentration remains at the 19500-strike price, while on the put side, 19,000 has the highest concentration.
The exact range for the upcoming weekly would be 19,000-19,550, but a break of either side would derail the range-bound rally.
Alternatively, the prices of gold and crude have already rallied, and as they cool down, this could result in favourable triggers for benchmark indices. Yet, the performance of IT and private banks is pivotal for sustained growth. Investors must withstand minor hiccups and maintain a long-term view amid potential sector-specific challenges.
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