Of late there has been so much information on the social/print media about the investments in stocks that I sometimes wonder, with all these recommendations available, that too free of cost, each one of us would have made millions!
In reality, how many of us have made the killings on dalal street? My interaction with different classes of investors tells me that a very low percentage of people (not more than 10-15%) could get decent returns on their investments while investing directly in the stocks. The rest of them ended up with losses.
Why is it difficult to make money by direct investments in stocks?
- Buying stocks on hearsay. Most of us buy stocks on the recommendations of somebody(friends/colleagues/social media/TV etc) without going through the nature of the business, financials, and quality of management of the company which we are buying. If the stock is doing well, we will not sell and book profits(greed) and we would be quick in booking the losses(fear) if the stock starts going down. Read more “Why do we tend to sell off during market corrections?”
- Patience. Patience isn’t waiting but it’s how we act while we are waiting. Good businesses will always recover from recessions, wars, and catastrophes. The only issue is whether we can hold on to the investments patiently. Reliance Industries did nothing from 2009-2017. 0% returns. It was at Rs 577/- in 2009 and with 0% returns over 8 years, still gave 13% CAGR over 13 years period. So, only if we have a sound process for investing, we will make money.
- Humility. It’s unwise to be too sure of one’s own wisdom. What we have control over is risk, cost, time, and our behaviour. But what we try to control is returns on our investments. The stock market is a great leveler.
- Dunning Kruger effect. The lesser the competence level, the higher the confidence level. So, only once we gain competence, we realise we didn’t know much. People’s IQs are becoming better but investing horizons are getting shorter. Investing is not a 160 IQ beating 130 IQ guy. It’s knowing ourselves, and our temperament. It’s important to know what we don’t know.
- Rationality. Why do we want to invest in a stock? What is the rationale, logic, and expectations from it? Mostly we lack rationality and are not clear as to why we want to invest in stocks. Is it to make some quick buck or is it the peer pressure to get into the stock market? It’s important to have a clear understanding of the investments in the stocks and a well-defined process in place. What works for your friend may not work for you.
- Diversification. Diversification is a protection against ignorance. It makes little sense for those who know what they are doing. Buying too many stocks in the name of diversification may be counterproductive.
- We are not buying stock. What we are buying is part of a business. So, it’s very important to understand the business for its nature, financials, and the quality of the management. Once we decide to buy, invest for a long time, as long as the business is doing good on all parameters.
- Our behaviour / temperament has to be such that we can survive the worst of the days. Not a single sprout from the seed of a Chinese bamboo is visible up to five years, but in 5 years and 6 weeks, we have a 90 feet tall bamboo tree. So, the growth of this bamboo tree is not in six weeks, it is five years and six weeks.
- Investing directly in stocks is not everyone’s cup of tea. Investment in stocks through mutual funds is a better option for most of us.
- If you find it difficult to understand the intricacies of investments, take professional help.
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