I recently came across a question on one of the forum that for equity investors sometimes buying itself becomes a guilty pleasure, something like say buying new toys to play with. For example, when investor has cash he/she tends to buy stocks. Isn't it more of addiction/gambling than being a rational decision? How to get rid of it?
I found the question interesting and answered it as follows.
We can overcome compulsive buying (guilt pleasure if you feel so) by adopting the following line of thinking and introspection:
1. Am I adding to my existing position - Ask yourself, would I have bought this share if I had none of it thus far? Is this the most attractive opportunity in the market in my analysis? Are there short term tailwinds on this sector or markets that present likelihood of this stock being available at lower prices in near future? Am I buying just because of bladder syndrome? If answer to all these questions confirms the buying decision, only then go ahead.
2. Am I buying a new stock – Looking for new ideas and analyzing them is a topic by itself. In short, the relevant questions that we need to ask are - Does it fit our portfolio? Does our study as an investor gives all the fundamental buy signals? What about MOS and valuations at current levels? Go ahead only if all the signals confirm. Not because XYZ expert recommended on TV or print media, not because some large investor bought, not because some newsletter recommended it, not because you missed the bus earlier, not because some big macro event is round the corner.
While there will be temptations to resort to buying stocks when an equity investor is holding cash, it is very much necessary to assess the overall market situation, one’s own portfolio and all the fundamental factors before taking the decision.