Parag Parikh's Stocks to Riches: A Guide to Understanding Investor Psychology and Behaviour
Stocks to Riches by Parag Parikh: A Book Review
If you are looking for a book that can help you understand the psychology of investing and how to avoid common pitfalls, then you might want to check out Stocks to Riches by Parag Parikh. This book is a distillate of his experience as a seasoned broker and expert in the Indian stock market. It simplifies investing in stocks and provides key perspectives for a lay investor venturing into the market.
stocks to riches by parag parikh pdf free download
Investing in the stock market is challenging, as the market dynamics are unpredictable. Analysts, brokers and retail investors realize to their dismay that investments do well, but investors don't do well. What could be the reasons behind this? What goes on in an investor's mind? What makes a stock market bubble? How does it burst? How does one find the right strategy of investing?
Intrigued by these pertinent questions, Parag Parikh, a seasoned broker and expert, took up this daunting task of understanding and demystifying investing in the stock market. Stocks to Riches is a distillate of his experience. It simplifies investing in stocks and provides key perspectives for a lay investor venturing into the market. At the end of the day, Stocks to Riches helps the retail investor make money by following the time-tested and proven guidelines provided in the book.
A must-read for brokers, analysts and retail investors, this book will help you learn how to think like a successful investor and avoid common mistakes that can cost you dearly.
Who is Parag Parikh?
Parag Parikh was a renowned stockbroker, investor, author and speaker. He founded Parag Parikh Financial Advisory Services Ltd. (PPFAS), one of India's leading portfolio management firms, in 1992. He was also a pioneer of behavioural finance in India and wrote several books on the subject, such as Value Investing and Behavioural Finance and Beyond Greed and Fear.
Parag Parikh was known for his contrarian and value-oriented approach to investing. He advocated long-term investing based on fundamental analysis and avoided chasing fads and trends. He also warned investors against succumbing to cognitive biases and emotional traps that can impair their judgement and performance.
Parag Parikh passed away in a car accident in Omaha, Nebraska, USA, in 2015. He was attending the annual shareholders' meeting of Berkshire Hathaway, the company run by his idol Warren Buffett.
What is the book about?
Stocks to Riches is a book that explains the basics of investing in stocks and how to overcome the psychological barriers that prevent investors from achieving their goals. The book covers topics such as:
The difference between investment and speculation
The three ways of investing: fundamental analysis, technical analysis and random walk
The introduction to behavioural finance and how it affects investor behaviour
The common cognitive biases and emotional traps that investors fall prey to, such as loss aversion, sunk cost fallacy, decision paralysis, endowment effect, mental accounting and mental heuristics
The drawbacks of mutual funds and why they are not suitable for long-term investors
The causes and consequences of stock market bubbles and how to avoid them
The importance of having a clear investment philosophy and strategy
The book is written in a simple and lucid language that makes it easy for anyone to understand. The book also provides examples, anecdotes and case studies from the Indian stock market to illustrate the concepts and principles discussed.
Why should you read this book?
You should read this book if you want to:
Learn how to invest in stocks wisely and profitably
Avoid common mistakes that can erode your wealth
Understand how your mind works when it comes to money matters
Develop a rational and disciplined approach to investing
Gain insights from one of India's most respected stockbrokers and investors
This book will help you become a better investor by teaching you how to think like one.
Main insights from the book
Investing vs Speculating
The first thing that an investor needs to understand is the difference between investment and speculation. Investment is buying an asset with an expectation of earning income or capital appreciation over a long period of time. Speculation is buying an asset with an expectation of selling it at a higher price in a short period of time.
Decision paralysis and the endowment effect
Another common psychological bias that affects investors is decision paralysis. Decision paralysis is the inability to make a decision or take an action due to having too many options or too much information. In other words, people get overwhelmed by the complexity and uncertainty of the situation.
Decision paralysis leads to several irrational behaviours, such as:
Delaying or avoiding investing in the stock market, due to not knowing which stocks to buy or sell
Missing out on profitable opportunities, due to not being able to act quickly or decisively
Staying in a status quo, due to not being able to choose among alternatives
Failing to diversify or rebalance the portfolio, due to not being able to evaluate the risks and returns of different assets
A related bias is the endowment effect. The endowment effect is the tendency to value something more when we own it than when we don't. In other words, people get attached to what they have and are reluctant to give it up.
The endowment effect leads to several irrational behaviours, such as:
Demanding a higher price for selling a stock or a property than what we paid for it
Refusing to accept a fair offer for a stock or a property, due to overestimating its worth
Holding on to a stock or a property that we inherited or received as a gift, even when it is not suitable for our needs or goals
Being biased towards a stock or a company that we work for or have an affiliation with, even when it is not performing well
One more common psychological bias that affects investors is mental accounting. Mental accounting is the tendency to treat money differently depending on where it comes from, where it goes, and how it is labeled. In other words, people create separate mental accounts for different sources and uses of money.
Mental accounting leads to several irrational behaviours, such as:
Spending more money from windfalls, such as bonuses, gifts, or lottery winnings, than from regular income
Saving more money in low-interest accounts, such as savings accounts or fixed deposits, than in high-interest accounts, such as stocks or mutual funds
Investing more money in familiar or safe assets, such as home country stocks or blue-chip companies, than in unfamiliar or risky assets, such as foreign stocks or start-ups
Separating money into different buckets, such as retirement fund, emergency fund, vacation fund, etc., and not using them interchangeably
Mental heuristics are shortcuts or rules of thumb that people use to make quick and easy decisions. Mental heuristics are useful when the situation is simple and clear, but they can also lead to errors and biases when the situation is complex and ambiguous.
Some of the common mental heuristics that affect investors are:
Availability heuristic: The tendency to judge the probability of an event by how easily we can recall examples of it. For example, investors may overestimate the likelihood of a stock market crash after witnessing one recently.
Representativeness heuristic: The tendency to judge the similarity of two things by how well they match a stereotype or a pattern. For example, investors may assume that a company with a good name or a good product is also a good investment.
Mutual funds: an idea whose time has gone
Mutual funds are pooled investment vehicles that collect money from investors and invest it in a portfolio of stocks, bonds, or other assets. Mutual funds are supposed to offer diversification, professional management, and convenience to investors.
However, Parag Parikh argues that mutual funds are not suitable for long-term investors, for several reasons:
Mutual funds charge high fees and expenses, which eat into the returns of investors
Mutual funds are subject to various regulations and restrictions, which limit their flexibility and performance
Mutual funds are influenced by market trends and investor sentiments, which lead them to buy high and sell low
Mutual funds are prone to conflicts of interest and agency problems, which affect their alignment with investors' interests
Mutual funds are not transparent and accountable, which make it difficult for investors to monitor and evaluate them
Parag Parikh suggests that investors should avoid mutual funds and instead invest directly in stocks or index funds. He also advises investors to do their own research and analysis, and follow a value-oriented and contrarian approach to investing.
The stock market bubble
A stock market bubble is a situation where the prices of stocks rise far above their intrinsic value, driven by irrational exuberance and speculation. A stock market bubble is usually followed by a crash, where the prices of stocks fall sharply and rapidly, causing huge losses to investors.
Parag Parikh explains the causes and consequences of stock market bubbles, using examples from the Indian and global markets. He identifies some of the factors that contribute to the formation of bubbles, such as:
Easy money and credit conditions, which fuel the demand for stocks
Herding behaviour and social proof, which make investors follow the crowd and ignore the fundamentals
Overconfidence and optimism bias, which make investors overestimate their skills and underestimate the risks
Greed and fear, which make investors chase returns and ignore valuations
Media hype and narrative fallacy, which make investors believe in stories and trends that justify the high prices
He also warns investors about the signs and symptoms of bubbles, such as:
High price-to-earnings ratios, which indicate that stocks are overvalued
Low dividend yields, which indicate that stocks are overpriced
High trading volumes and volatility, which indicate that stocks are driven by speculation
New entrants and IPOs, which indicate that stocks are in high demand
Euphoria and complacency, which indicate that stocks are in a state of irrational exuberance
Stocks to Riches by Parag Parikh is a book that teaches investors how to think like a successful investor and avoid common pitfalls that can cost them dearly. The book covers the basics of investing in stocks and how to overcome the psychological barriers that prevent investors from achieving their goals.
The book is based on the author's experience as a seasoned broker and expert in the Indian stock market. The book is written in a simple and lucid language that makes it easy for anyone to understand. The book also provides examples, anecdotes and case studies from the Indian stock market to illustrate the concepts and principles discussed.
The book is a must-read for brokers, analysts and retail investors who want to learn how to invest in stocks wisely and profitably. The book will help you develop a rational and disciplined approach to investing and gain insights from one of India's most respected stockbrokers and investors.
Here are some frequently asked questions about the book and the topic:
Where can I download the PDF of Stocks to Riches by Parag Parikh for free?
There are several websites that offer free PDF downloads of the book, such as zlib.pub, ebookscart.com, bookarchive.net, etc. However, these websites may not be legal or safe, and may contain viruses or malware. Therefore, it is advisable to buy the book from a reputable source, such as Amazon or Flipkart.
What are some other books by Parag Parikh?
Some other books by Parag Parikh are Value Investing and Behavioural Finance, Beyond Greed and Fear, Wealth Creation: Thoughts on Value Investing, and The Art of Wealth Creation.
What are some other books on behavioural finance?
Some other books on behavioural finance are Thinking, Fast and Slow by Daniel Kahneman, The Psychology of Money by Morgan Housel, Nudge by Richard Thaler and Cass Sunstein, Misbehaving by Richard Thaler, Irrational Exuberance by Robert Shiller, Fooled by Randomness by Nassim Taleb, and The Little Book of Behavioural Investing by James Montier.
How can I apply the lessons from the book to my own investing?
You can apply the lessons from the book to your own investing by following these steps:
Understand the difference between investment and speculation and choose your strategy accordingly
Pick a method of investing that suits your personality, goals and risk tolerance
Become aware of your own psychological biases and emotional traps and learn how to overcome them
Avoid mutual funds and invest directly in stocks or index funds
Do your own research and analysis and follow a value-oriented and contrarian approach to investing
Avoid getting caught in stock market bubbles and follow a contrarian strategy of buying low and selling high
Have a clear investment philosophy and strategy and stick to it
Review and monitor your portfolio periodically and make adjustments as needed
I hope you enjoyed reading this article and learned something useful from it. If you have any questions or feedback, please feel free to leave a comment below. Thank you for your time and attention.