When investing backfires: why people lose money in stocks?
Do you know that ‘Sir Issac Newton’ (the guy who claimed to discover gravity when an apple accidentally fell on him) also lost money in the stock market? (Read more here- Business Insider)
Yeah, he was a genius. The guy was a mathematician, physicist, astrologer, theologian, and author. He laid the foundation of classical mechanics and formulated the laws of motion and universal gravitation.
Still, he made mistakes in the stock market and lost money.
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Let me put some straight facts here. Over 90% people lose money in the stock market. There are many investors/traders whose portfolios are in ‘RED’ even when the market is high, and Sensex is making new records. So, if you had also lost some money in the market, do not feel too bad.
Now, I’m neither a genius nor a stock market expert. I’m just another guy who has been involved in the market for quite some time and has read countless books on the stock market. Nevertheless, in my last 3+ years of experience in the stock market, I have noticed few common, yet big mistakes that most of the stock market investors make which led them to lose money in the market.
Here are 5 biggest ‘mistakes’ that stock market investors make and as a result lose money in the stocks:
1. ‘Too-lazy-to-research’ kinda attitude:
The majority of people just want a stock ‘name’. Tell them the name of a company which makes ‘Ethyl chlorine’ and has rallied over 40% in the last eight trading session and they will be good to go. They do not believe in researching the product/services of that company or reading its financial reports. (I won't be even surprised if you tell me that these investors do not know what's the use of ethyl chlorine before investing in that company). All they need is the name of a company which they have heard/read from a business magazine, advisor, friend/colleague, etc. and they are ready to invest.
2. Failing to understand that ‘Rs 15’ is not always ‘cheap’ and ‘Rs 1,000’ is not always ‘expensive’:
One of the biggest mistake that stock investors make is to judge the stocks by their share price. Can you tell a Rs 15 ‘pencil’ to be cheap? It’s the business that should be evaluated, not the market price.
3. Zero-diversification or over-diversification:
Recently I came across the portfolio of a friend who was holding 32 stocks in his portfolio. I asked him how he monitors all these stocks every quarter. It’s challenging to follow 7–8 stocks and he was holding 32. He replied that he had made a virtual portfolio in ‘Money-control’ app, where he tracks the net profit and loss daily. It was a hard time explaining to him that tracking ‘profit and loss’ is not similar to monitoring the stocks. Monitoring means to check the performances like quarterly/annual results, corporate announcements, change in management, etc.
Further, over-diversification kills the profit. Even if 3-4 of your stocks are doing fantastic, however, the net effect on your portfolio will be quite less if you are holding 25-30 shares.Here’s a quote on over-diversification by the world’s most significant investor- Warren Buffett.
"Diversification is protection against ignorance. It makes little sense if you know what you are doing." -Warren Buffett
If over-diversification is bad, then zero-diversification in even worse. Investing all your money in just stock can easily destroy your entire wealth in the case your investment doesn’t go as planned because of whatever reason.
4. Holding to your ‘losers’:
This can be a little difficult to explain. Yes, you should not sell the stock if the stock price is little down and should hold it if you are confident that it will give good returns in long-term. However, just with an expectation to ‘break-even’ your investment amount and to keep losing money for years does not make sense. If the stock is consistently giving bad results, then get over it. Sell that stock and invest in another good one. If you do so, you won’t just break-even, you’ll break-through and make real profits.
5. Sudden ‘Over-exposure’:
“Market is doing good. Let me invest INR ten lakhs in stocks now”. Please do not do that. Start small if you are a beginner and are investing on your own. Otherwise, take the help of a financial advisor or invest in mutual funds. Sudden over-exclosure has quickly destroyed the wealth of a number of stock market investors in India.
That’s all. Although there are some other reasons also why people lose money in stocks, however, these are the top 5. I hope this post is helpful to you.