Over 90% people who put their money in stock markets end up losing more than they manage to earn. I am often asked why do people lose money and thus fail in stock markets even when the markets have always made new highs on a long-term basis. It is a difficult question to answer because failure in stock markets is more to do with behavioral aspects than intellectual aspects. It is the attitude of people towards stock markets that decide whether or not they will succeed.
Where people lack in their attitude towards stock markets can be understood by having a look at the following points:
1. Having a short-term view – Most people want instant gratification. They are not willing to wait for years. Instead, they want their money back, with huge returns, almost instantly. They feel that their money in 'blocked' when they invest in some stock. Stock markets are not like casino where you place bets and win huge sums. It is a wealth creation tool and one needs to treat it that way. Stock markets offer a huge opportunity to grow (even multipl) one's wealth. But you need to wait. Trading can be thrilling but you end up losing. The famous investor George Soros said, “If investing is entertaining if you’re having fun, you’re probably not making any money. Good investing is boring.” Stock markets are not the best places to have fun.
2. Not studying the company before putting money into it – Most people treat a company’s name as just another ticker symbol. They do not care what the company does, who manages the company, who are its competitors, what advantages it enjoys and what is its future outlook. This again is a sign that people do not want to think a lot and want their money’s worth immediately. They do not even want to learn about the very thing they are putting their money into. What else can we expect but losses?
3. Getting affected by noise around oneself – There is news floating around us everywhere. Television channels, the internet, mobile app notifications keep us on the edge of our seats. Companies are not as dynamic as they are made out to be in the media. There is some news about every company and the news comes out at an incredible pace. Even our milkman and the tea vendor off the street are experts. Some colleague tells us about some ‘insider news’ about a company that we have invested in and we lose our sleep. We need to realize that such a plethora of news does not help us and relying on every other news will only lead us to make investment mistakes.
4. Trying to time the market - We all want to make a fortune in the stock market. So we want to buy low and sell high. That is what we have been told to be the success mantra in the stock markets. So what we do is we wait before jumping in. We wait for the stock to fall and reach its lowest point before we invest our money into it. Everything is fine with this approach except for the fact that nobody knows that ‘lowest point’. If you want to time the market you will not get very far. Not even the most experienced investors over the world have been able to predict the short-term movements in the market. It is best to invest now in a worthy company than to wait for a fall.
5. Non-willingness to learn – I often say, “Everybody wants to earn. But nobody wants to learn.” Investing in stock markets is an art and one needs to master this art before he/she can hope to make profits out of it. There are so many great books written by the masters of this field. One needs to read them to learn about the timeless investment wisdom these books contain. One needs to attend seminars, conferences, programs and courses if one is keen to have a deep understanding of stock markets. If you do not put in the hard work to learn, the market will make sure that you do.
6. Becoming a victim of analysis paralysis – Most people do not want to analyze the company they want to invest into. But there is another group of people who analyze a little too much. One often finds what one looks for. These people just look for faults, and they surely find it. Then they conclude that the company is not worth considering from an investment perspective. There is no perfect company in this world. There are some faults in each company. What one needs to conclude is whether the faults outweigh the advantages the company enjoys or is it the other way round. Focusing just on the faults only results in missed opportunities. The point I want to make here is that a complicated approach invariably results in wrong investment decisions. One needs to look at a few key variables and stick to them as opposed to judging a company on the basis on a hundred parameters.
7. Non-willingness to accept one’s own mistakes – You cannot afford to be arrogant in stock markets. You cannot be right every time and you should accept this fact. Every investor makes mistakes in stock market investing - even the greatest of them. What separates the great investors from the average ones is that the former ones accept their mistakes, learn from them and make sure that they never repeat them. The average investors are too arrogant. They credit themselves in bull runs and blame the market when they suffer losses, but they never accept their mistakes. The result is that they never learn, and never improve.
8. Falling in love with certain stocks – Some investors are too emotional. They are too attached to the stocks that have made money for them and are not willing to part with them even when the winds have changed direction. No company can make profits for investors forever. One needs to hold stocks of the companies when they are growing and are trading in the market at acceptable prices, and exit when they are not doing well or when they become overvalued. Stock markets are meant for making money and one needs to be practical when it comes to investing and refrain from taking emotional calls.
I hope this article would help you to have the correct approach towards stock investing and thus reap the immense benefits that stock markets offer us to build our wealth.
This article is contributed by CA Vikram Narsaria, SEBI Registered Investment Adviser and founder of stock advisory portal paisapub.in
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