Spend, Save and Invest Smartly

Common Blunders One Commits while Investing in the Stock Market

One has heard the famous four words which call for a bold entry into the stock market” This time it’s different”. The stock markets are at their all time highs and one is fueled by a force so powerful that jump in is the only word that rings in one’s head. To top it all the only word from one’s friends are “Hurry Up”, “Don’t waste the opportunity”, “ You will Regret later” .Putting it mildly one feels he is the greatest coward on the planet. Emotions take over. Reason takes a back seat. A rush of blood to the head and one has jumped into the market. The bundle of cash is gone and one is invested in the market for better or for worse. Remember “a fool and his money soon part”.

What is the infamous herd mentality?

There is a famous saying “ A rising tide lifts up all boats”. When the markets are rising everyone wants a piece of the action. Broker’s recommendations are to buy fast and make a killing in a month. Greed takes over. Thoughts of being the next Warren Buffett creep in. At the party circuit boasting has become the norm. But what happens when the market sinks like a stone? Panic sets in. Bears are all over the place .Within seconds one comes to a conclusion that stock markets are the last place to be. One makes a beeline for the exit. But is this the right approach? Famous saying by Warren Buffett “Be fearful when others are greedy and greedy when others are fearful”. This is in stark contrast to the herd mentality. One never makes a loss until he actually sells out and panic selling is a certain loss. Remember in the short run the market is a voting machine and in the long run a weighing machine. Get set for the long haul. Stay invested reap the profits.

Should one average downwards?

One has heard the saying “Common sense is not so common”. One must never let emotions cloud reason. While one invests in the stock market bias plays a very important role. If one works for an IT Company he believes that IT stocks are the be all and end all of the stock market. Worse one picks up a single stock and keeps investing in it. Ego plays a big role. The willingness to accept that one’s decisions may be wrong is not there. One accumulates more of these shares even as prices move downwards. If this stock crashes and does not rise one faces huge losses .The writing is on the wall. Remember one must always conduct sound research on the stocks he is investing in. After a thorough research and a study of the market narrow down a set of stocks and stay invested in them. One might believe that over diversification is the way to go but handling a large portfolio of stocks is a pain and one cannot do justice to such a diverse holding. Remember research..select the best…hold for the long term.

Hope is an emotion

Very often one invests in the markets blindly with the hope that plain dumb luck might be the next best thing. Remember hope is an emotion and markets do not yield returns on emotions. Hope for the best does not work in stock markets.

  • One may purchase a share on blind emotion and hold on to it no matter how low it falls on the hope that it would rise in the near term and one would eventually make a profit.
  • Gambling based on hope is a practice where one invests in markets and takes a small profit. One invests INR 100 in 5 different stocks and when the prices rise make a small profit as less as INR 10 per stock. In this method one restricts his profits to a particular level or a ceiling .If one suffers a single significant loss the entire profit is wiped out .
XYZ Stock Buy the Share Sell the share Profit / Loss
1 100 110 10
1 100 105 5
1 100 110 10
1 100 105 5
1 100 70 -30
1 100 Net Gain 0

One needs to enter the stock markets with a sound strategy rather than just mere emotion. One needs to invest in the stock market in a way which is consistent to his financial goals. One needs to invest based on his time horizon. “How much money is required to take that foreign holiday and how fast can one obtain these funds”. One now has a goal namely the holiday as well as a time frame say a year.

Investing on tips

There is a famous saying by Warren Buffett “Wall Street is the only place where people who ride in a Rolls Royce seek advice from those who ride the subway”. How often does one fall for rumor and gossip in the share market? One gets a hot tip from a friend “I’ll tell you a secret”. XYZ is the next big thing in software. This Company will soon have a monopoly in the oil industry. This Company will take the online marketing and retail World by storm. The good news is it is so cheap ..just 10 bucks a piece. Wow just feels like insider trading. Get a tip from your friend lose half your money. Get a tip from the Director of the Company lose all your money is a famous saying.

Putting past history above all things

One’s common belief is that the future of a stock is in its past .Think technical analysis .All those tables and charts. One needs to understand that just because a stock has done well in the past its future is not certain. Certain stocks which were super hits in the past have simple gone off the radar with time. Only a Company which adapts to change in technology and changing times has a good chance of survival and making a profit in today’s hectic world. Remember the investor of today does not profit from yesterdays growth”.

Setting unrealistic goals

One of the common mistakes one makes while investing in the stock market is having an unrealistic expectation. Doubling returns in a month is the norm. One has the patience of a 5 year old when one invests in the stock market.

  • Markets have rallies basically they rise high rapidly and tend to correct on profit booking when people book profits. One needs to enter the market on these corrections or dips when the market falls by about 15-20%.One is a fool if he waits for the time the market reaches rock bottom and he will be forever waiting. Strike when the iron is hot.
  • Remember if one is not confident to take the bold approach then index funds might be the way to go. If one cannot understand stock markets, yet wants to jump in a more safer approach is in order. In the words of Jim Rogers “ Index investing outperforms active management year after year.
  • If one is not sure how to go about his investments then timing the market is definitely not his cup of tea. One might need to stay invested in the market at all times. Think SIP.
  • If one finds no value in the stock market or no shares matching his expectations then the wait and watch approach might be best. Sitting on a pile of cash is definitely not wrong. Remember cash is king.

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