There are finfluencers (financial influencers) who influence people on social media platforms about which mutual fund to invest in, which stocks to buy, which IPO to buy, what’s the market trend etc. Finfluencers generating content on financial topics, are rapidly rising in popularity on social media. Many finfluencers earn a lot, even lakhs, by making videos on initial public offers and posting them on social media platforms. Most important fact is they are totally nobody. There is no reason to listen to them. They are just social media personality that give quotes, life lessons and business advice which they take from Google and based on which they give business advice. In short, they deceive their followers.

A finfluencer usually promotes a broking firm by adding a link to open an account. They get a commission for each account opened using that link; some even get a share of the firm’s earnings from these accounts.

In June 2024, the Securities and Exchange Board of India (Sebi) has taken a bold step by banning regulated entities from getting associated with unregistered finfluencers. This crackdown targets anyone who provides financial advice or makes claims about securities without Sebi’s registration. Earlier, Sebi had noted concerns about finfluencers promoting some of the IPOs falsely instead of objectively informing the investors of its merits and risks. People invest their hard-earned money into various financial products with having actual information. 

SEBI’S new regulations create a distinct separation between qualified financial advisors and unregulated online influencers. Regulated entities such as brokers, mutual fund houses, research analysts and financial advisors are now strictly prohibited association with unregistered finfluencers. This ban includes partnerships for marketing purposes, sharing client information, or receiving financial benefits from their activities. Sebi is also establishing a secure payment system for registered investment advisors (IAs) and research analysts (RAs) to collect fees from their clients. This ensures that investor payments are directed only to authorised professionals, making it easier for investors to distinguish between registered IAs/RAs and unregistered finfluencers.

Younger people are increasingly turning to content on platforms such as TikTok as they are more aware of their personal finances, with #fintok currently at 927.8 million views. The influencers often share their personal financial journeys, offer financial literacy education, and promote various financial products and services. They may collaborate with financial institutions, promote budgeting apps, or review investment options. Like other influencers, they can monetize their influence through sponsored content, affiliate marketing, and other means.

There is high appeal in financial information that comes in bitesize, light-hearted formats and Gen Z and millennials are turning to finfluencers to improve their financial education and boost financial literacy levels.

Sebi’s move addresses the troubling alliance between market intermediaries and shady influencers. ‘Finfluencers’ have been linked to discount brokers, driving up trading activity and often misleading investors with false profit claims on platforms like YouTube and Telegram.

Finfluencers have played an impactful role in spreading financial awareness and motivating investors to actively participate in the finance market. However, their activities remain unregulated, posing risks to investors. Some famous finfluencers are Shaunak Udupa who enjoys 150k subscribers, Rachana Ranade with 4 million subscribers, Anushka Rathod enjoys 17.3k subscribers, Sharan Hegde 1.1.k subscribers.  

Recently, the Securities and Exchange Board of India (SEBI) has taken a stern stance against a social media influencer, Mohammad Nasiruddin Ansari, widely known as ‘Baap of Chart.’ Recently, SEBI imposed a ban on Ansari from the securities market, accompanied by a substantial fine of Rs 17.2 crore.  Ansari is the sole proprietor of the firm Baap of Chart (BoC). He promoted himself as a stock market expert on various social media platforms and invited investors/ clients to enrol for various “educational courses” offered by him. According to SEBI’s order, Ansari marketed his stock recommendations as educational training, but he was trying to sell them. Ansari is a self-proclaimed investment expert who used to provide stock recommendations under the moniker ‘Baap of Chart’ through platforms like X, Telegram, and YouTube. However, his actions did not go unnoticed by SEBI. Along with his associate Rahul Rao Padamati and their company Golden Syndicate Ventures, Ansari has been barred by SEBI until further notice.

Market regulator Securities and Exchange Board of India has issued a draft circular in which it has asked companies that are coming out with a public issue to include audiovisual (AV) presentation of disclosures made in their offer documents for interested investors. In the draft circular dated March 19, the regulator said that the IPO’s AV presentation should start with a disclaimer that investors must not rely on any other content, such as those made by finfluencers, and that the lead managers of the issue be responsible for the content and information made available on the AV. Sebi said: investors are advised not to rely on any other document, content or information provided on the offer on the internet/online websites/social media platforms/micro-blogging platforms and by the finfluencers since the same is not approved/commissioned/paid by the company or its promoters/directors/KMP (key managerial personnel) in any manner.

By this move, SEBI wants to eliminate unregistered finfluencers providing illegal investment advice through social media channels. Restrictions have been imposed on intermediaries, such as brokers and mutual funds, from engaging unregistered finfluencers for product promotion. The rise of finfluencers signals that people have money to invest.

Behavioral finance is quite a new subject in the management realm that seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions. Classical investment theories are based on the assumption that investors always act in a manner that maximizes their investments returns. Yet, a number of researches show that investors are not always so rational. The fundamental principle of the classical theory is that the economy is self‐regulating.

People get puzzled when the uncertainty regarding investment decision overwhelms them. People are not always rational and same is the case with markets. They are not always efficient. Behavioral finance explains why individual do not always make the decisions they are expected to make and why markets do not consistently behave as they are expected to behave. Many studies have shown that the average investors make decisions based on emotion, not logic; most investor’s buy high on speculations and sale low on panic mood. Most of us do that; do we? Psychological studies reveal that the pain of losing money from investment is almost three times greater than the joy of earning money. Emotions such as fear, impulse and greed often play a pivotal role in investor’s decision; there are also other causes of unreasonable behavior.

It is observed that stock prices moves up and down on a daily basis without any change in fundamental of economies. It is also observed that people in the stock market move in herds and this influence stock prices. Theoretically markets are efficient but in practice, they never move efficiently. For example, a reputed company announces a mega investment in an emerging area over next few years, the stock price of the company starts moving up immediately without looking into the prospects, return or the amount of investment to be made in this project. That is how the behavior of investor moves the stock price. Let me give hear a classical example: there is news since many years that Government o Maharashtra is planning to have another airport in Panvel, Mumbai. Immediately the property prices in Panvel shot up. Even if the Government is planning an airport in Panvel, the execution might take years, but the news itself has already augmented the property prices there.

Behavioral finance is a relatively new field that seeks to combine behavioral and cognitive psychological theory with conventional economic and finance to provide explanations for why people make irrational financial decisions. It is very popular in stock market across the world for decisions related to investments. Behavioral finance is the study of psychology, sociology and anthropology on the behavior of the financial practitioners and the subsequent effect on the security market. It helps to understand why people buy or sell stock without doing fundamental analysis and study. It helps to understand why investors behave irrationally in investment decisions. Some important definitions of behavioral finance are summarized hereby.

According to Olsen (1998) behavioral finance seeks to understand and predict systematic financial market implications of psychological decision process. Belsky and Gilowich (1999) have referred to behavioral finance as a behavioral economics and further defined as combining the twin discipline. Jay R Ritter (2003) has given a brief introduction of behavioral finance published in Pacific Basin Finance Journal. In his research article, he rejected the traditional assumption of expected utility maximization with rational investors in efficient market. The two building blocks of behavioral finance are cognitive psychology (How People Think) and the limit of arbitrage (when market will be inefficient).

Behavioral finance seeks to find how investor’s emotions and psychology affect investment decisions. It is the study of how people in general and investors in particular make common investors make errors in their financial decision due to their emotions. It is nothing but the study of why otherwise rational between cognition. Leon Festinger’s theory of cognitive dissonance states that individual attempts to reduce inner conflict in one of the two ways: (i) he changes his past values, feelings or options; and (ii) he attempts to justify or rationalize his choice. This theory may apply to investors and traders in the stock market who attempt to rationalize contradictory behaviors, so that they seem to follow naturally from personal values or view point. In “Financial Cognitive Dissonance”, we change our investment styles or beliefs to support our financial decisions. For instance, investors who followed a traditional investment style (fundamental analysis) by evaluating companies using financial criteria such as, profitability measures, especially, profit/earnings ratios, started to change their investment beliefs. Many individual investors purchased retail internet companies in which these financial measures could not be applied. Since these companies have no financial track record, very little revenues and no net losses. These traditional investors rationalized the change in their investment style as per past beliefs in two ways: the first argument by many investors is the belief that we are now in a “new economy” in which the traditional financial rules no longer apply. This is usually the point and the economic cycle in which the stock market reaches its peak. The second action that displays cognitive dissonance is ignoring traditional form of investing and buying these internet stock simply based on price momentum.

In behavioral finance, Regret theory states that an individual evaluates his or her expected reactions to a future event or situations. Psychologists have found that individuals who make decision that turn out badly have more regret when that decision was more unconventional. This theory can also be applied to the area of investor psychology within the stock market, whether an investor has contemplated purchasing a stock or mutual fund which has declined or not, actually purchasing the intended security will cause the investor to experience an emotional reaction. Investors may avoid selling stocks that have declined in value in order to avoid the regret of having made a bad investment choice and the discomfort of reporting the loss.

In addition, the investor sometimes finds it easier to purchase the “hot or popular stock of the week”. In essence, the investor is just following “the crowd”. Therefore, the investor can rationalize his or her investment choice more easily if the stock or mutual fund declines substantially in value. The investor can reduce emotional reactions or feelings since a group of individual investors also lost money on the same bad investment. In investing, the fear of regret can make investor either risk averse or motivate them to take greater risk.

In behavioral finance, Prospect theory deals with the idea that people do not always behave rationally. There are different psychological factors which motivate people in investment decision under uncertainty. It considers preference as a function of “decision weights” and it assumes that these weights do not always match with probabilities. It further suggests that decision weights tend to overweigh small probabilities and under-weigh moderate and high probabilities. Prospect theory demonstrates that if investors are faced with the possibility of losing money, they often take on riskier decision at loss aversions. They tend to reverse or substantially alter their revealed disposition towards risk. People consult astrologers, tarot card readers, numerologists to seek divine interventions in their investments. This just proves how irrational investors become while choosing their investment options.

The Anchoring theory is a phenomenon in which in the absence of better information, investors assume current prices are about right. People tend to give too much weight to recent experience, extrapolating recent trends that are often at odds with long run average and probabilities.

The theory of Over and under reactions relies on the fact that market does not reflect the available information. The feelings are euphoric at times and depressing some other times. The information is most of the illusionary in character. Usually they are too pessimistic when it’s bad and too optimistic when it is good says Bill Miller. The consequences of investors putting too much weight on recent news at the expense of other data are market over or under-reaction. People show overconfidence. They tend to become more optimistic when the market goes up and more pessimistic when the market goes down. Hence, prices fall too much on bad news and rise too much on good news. And in certain circumstances, this can lead to extreme events.

Behavioral Finance builds on existing knowledge and skills. The primary focus of this subject relies on how behavioral approaches change the decisions of investors in financial markets.

Warren Buffett

While studying his graduate studies at Columbia, Warren Buffett was the only student ever to earn an A+ in one of Graham’s classes. But, both Ben Graham and Warren’s father advised him not to work on Wall Street after he graduated. Warren Buffett was so determined to start his work soon after graduation that he offered to work for the Benjamin Graham’s partnership for free. Ben turned him down. He preferred to hold his spots for Jews who were not hired at Gentle/goof firms at the time. Warren was crushed. Returning home, he took a job at his father’s brokerage house.

Graham, who is well known as Warren Buffett’s mentor, learnt his investment lessons with many obscurities; his losses in the stock market crash of 1929 and the subsequent bear market during the Great Depression led Graham to sharpen his investment techniques. These techniques sought to profit in stocks while minimizing downside risks. He did this by buying shares of companies whose shares traded far below the companies’ liquidation value. In simple terms, his goal was to buy a dollar’s worth of assets for 50 cents, and he did that very well, both in theory and in practice. There were two general ways that Graham used to do this. The first method was the use of market psychology; that is, using the fear and greed of the market to earn profits and the second was to invest by the numbers.

Like his mentor, Warren Buffett restricts himself to businesses he can fairly understand and analyze. Investment success is not a matter of how much you know but rather how sensibly you define what you know and what you don’t know. Buffett considers this wisdom of understanding for the operating business. It is a prerequisite for a feasible forecast of future business performance. After all, if you don’t understand the business, how can you project performance? Buffett’s each business beliefs support the goal of producing a robust projection. First, analyze the business, not the market or the economy or investor sentiment. Next, look for a consistent operating history. Finally, use that data to ascertain whether the business has positive long-term prospects or not.

Warren Buffett has amassed a personal multibillion dollar fortune mainly through investing in stocks and buying companies through Berkshire Hathaway. Shareholders in Berkshire Hathaway who invested $10,000 in the company in 1965 are above the $50 million mark today. Now in his 80s, Warren Buffett has yet to write a single book, but among investment professionals and the investing public, there is no more respected voice.

His advice to the world of investors is very straightforward “be wise while investing but don’t fall in love with your stocks” In one of his interviews on CNBC which lasted for about 3 hours he shared his wisdom with the world which is worth million dollars. The excerpts are as follows:

1. Don’t let world events affect your investments

Warren Buffett says even if you realize a big war is about to take place and is unavoidable, still buy stocks. You’re going to invest your money in something over time. One thing you can be sure of is if a war broke, the value of money would go down. … That happens virtually in every war. The last thing anybody should do is hold money during a war; because after the war you might want to own a farm, you might want to own an apartment house, you might want to own securities. By holding you money without investing it somewhere, you are simply declining its growth. During World War II the stock market advanced. The stock market will have its ups and downs as it is, but eventually it is going to advance some time.

2. Don’t get affected when your stocks go down

Warren Buffett only likes to buy stocks for a lot less than he thinks they are really worth, this suggests you can get a bargain or two—although, as always, there is no guarantee. Instead when your stocks go down, buy more. Some day they have to be revived. Precision in stocks is just not possible. Have patience; give some time to your investment. Get associated with your stocks by watching their movement.

3. You don’t have to be an expert

The stock market offers you so many opportunities to invest in thousands and thousands of different businesses. You don’t have to be an authority on every one of them. You don’t need to be an expert on 10 percent of them even. You just have to have some conviction that a given company or a group of companies are likely to make more money 5, 10 or 20 years down the line from now on. Read up, gather information, discuss with your friends, some professional and that is not so difficult to make a decision. Warren Buffett advices to be watchful and use common sense; and if you have no expertise at all, Warren Buffett recommends a low-cost index fund. Keeping costs to a minimum is enormously important in investing. If you’re in effect paying out 1 or 2 percent annually of your portfolio, that’s a big tax that you don’t have to pay.

4. Don’t go for immediate gratification of quick profits  

• Generally speaking, everyone is interested in making a quick profit and there’s no law against making quick profits. But while investing one needs to be wise; invest in stocks of companies which are there to stay, not the ones who are established for cheating investors. Grow with the company you have invested in. Don’t make money by selling the company. … The answer isn’t to sell the company. The answer is to keep running the company well. Take pride in your stocks; see the growth of the companies, therefore, understand its revenue, expenses, growth potential, assets, liabilities, and a host of other information.

5. Bulls markets are fun for little time

Warren Buffett warns against the whimsical and irrational bullish market behavior of stock market. Prices in the bullish face make an investor “behave irrationally as well” he says. He also urges nervous or beginners in investment against going into stocks at a time of extreme exuberance and becoming disillusioned when paper losses occur. A Bull market is when everything in the economy is great, people are finding jobs, gross domestic products (GDP) is growing, and stocks are rising. Things are just plain rosy! Picking stocks during a bullish phase is easier because everything is going up. Bull markets cannot last forever though, and sometimes they can lead to dangerous situations – especially when stocks become overrated. If a person is optimistic and believes that stocks will go up, he or she is called a “bull” and is said to have a “bullish outlook”.

The remedy to that kind of mistiming is for an investor to accumulate shares over a long period and never sell when the news is bad and stocks are well off and elevated. Warren Buffett’s bottom line fundamental advice: “Ignore the gossip, keep your costs minimal, and invest in stocks as you would in a farm.” He also advises investors forming macro opinions or listening to the macro or market predictions of others is a waste of time.

Some of the illustrative investments that fuelled Warren Buffett’s (Berkshire Hathaway) fortune include the kinds of companies that he called ‘inevitables’ they are cash generative brands such as Gillette, Coca Cola and American Express. In the case of American Express, Berkshire first bought its shares in the company in 1964, adding weight to one of the Sage’s famous observations; in his words “our favorite holding period is forever.”