How to Become a Rational Investor in the Stock Exchange and Earn Money


How to Become a Rational Investor in the Stock Exchange and Earn Money


KONTAN.CO.ID – JAKARTA.(6/10/2021) Rational investors are one of the keys to a more efficient stock market. To become a rational investor, the author of financial and investment books and investment advisor, Budi Frensidy, advises investors to learn to analyze fundamentally.

“Because investment is the basic principle of comparing value and price.” Budi explained at the 2021 Indonesia Financial Expo and Forum (IFEF), which was held virtually, Wednesday (6/10).

Investors need to always look for stocks whose value is above their price. This principle applies not only to stock investment, but also to other forms of investment.

It is important to be able to know the value of a stock so as not to get involved in investing just to keep up with others. Especially at this time, there are unscrupulous parties who suggest buying a certain stock alias pompom. As soon as the share price in question has increased, the parties who suggested it are ready to sell their shares.

“If you’re not careful, you’ll end up just following along. Then you’ll end up buying shares at high prices” he added.

This condition will be detrimental to investors, considering that the focus of investors will no longer be looking for profits, but only to save themselves so as not to lose.

On the other hand, investors can learn to control emotional biases so that they do not affect their investment decisions. Budi said that controlling oneself and better understanding one’s own shortcomings could train this emotional bias. So that later, these weaknesses can be improved slowly.

Just so you know, experiencing behavioral bias can indeed occur among investors. This bias results in irrational investors, which makes the stock exchange, both in Indonesia and in other countries, tend to be inefficient.

The behavioral bias arises because of the unavailability of perfect information, perfect rational with perfect self-interest. These biases are then grouped into cognitive biases and emotional biases. Cognitive bias stems from faulty reasoning.

Studying and reading more can overcome this bias. While the emotional bias stems from instinctual intuition rather than conscious calculation, more effort is needed to overcome it.

Then, the cognitive bias was regrouped into belief perseverance and information processing. Included in the belief perseverance cognitive bias are conservatism bias, confirmation bias, representativeness bias, illusion of control bias, and hindsight bias. Meanwhile, there are information processing cognitive biases, anchoring (reference) bias, mental accounting bias, framing bias, and availability bias.

For emotional bias, there are loss aversion bias, overconfidence bias, self-control bias, status quo bias, endowment bias, and regret aversion bias.

The implications of investors experiencing behavioral bias are experiencing excessive trading, concentrated portfolios in one or several stocks, allocation of assets that are not in accordance with investment objectives, and borrowing interest that is higher than the interest on the savings they have.

In addition, returns are below market or reference, there is no asset allocation for shares or property, views and treats dividends and capital gains differently, herding, and disposition effects.

Regarding disposition effects, stock investors in any exchange mostly do this. According to Budi, investors tend to sell the winners too soon and hold the losers too long.

To overcome this, investors do need to determine the tolerance limit for losses. On the other hand, setting the upper limit for realizing profits is three times that.