#5 Reasons People Lose Money In Stock Market
Have you been losing money in stock market? Are you experiencing the following problems while investing?
1. Buying shares only to see the stock price declining?
2. Booking your profits too soon only to see the share move way higher then your sell price?
3. Buying a share on its way down, only to see it go down further and then deciding to remain invested in it for Life
4. Incurring heavy losses by investing at the peak of the market cycle and then leaving share market forever
Well. Don’t Worry. I am going to illustrate with real life examples the common mistakes that lead people to lose money in stock market.
My first investment in stock market was in the year 2008 with a small sum of 4072 Rs. I had invested in Adlabs Film (now renamed Reliance Media) with a lot of enthusiasm but I did not know that I had invested when the global financial crisis was in full swing. As the stock price declined I just stopped looking at my trading account.
It was in 2012 when I took investing seriously and decided to start learning the tricks and trade of the stock market. In this process I experienced all of the above problems and with no one to guide me I found it tougher to make even a small profit. I had also quit my job in 2013 and started investing full time which just added more pressure to not lose money in stock market.
After making some initial losses, I read about the big investors like Warren Buffet, Peter Lynch, Rakesh Jhunjhunwala and others who made it big in the world of investing. I thought if they can make money then what is that I am doing wrong and it took a while to learn their secrets.
So Here I am today, having survived initial hardships, having gained a lot of experience and in this article I am going to show you with real life examples, 5 reasons why People Lose Money In Stock Market. So let’s get to it.
1. Not Researching Your Stocks and Investing Blindly
An average investor does not research the company in which he/she is about to invest. The reason is simple. Who has the time for even performing a small bit of research. Our job leaves us with no time to spare; But then who said that being rich was child’s play. You need to put in at least some effort to get somewhere.
In the year 2008, a friend of mine introduced me to stock market. I opened a demat account and with some savings from my salary I decided to invest. The next step was to find a stock and in order to do so I relied on advice from people who were trading money with small amounts. I heard about a stock called “Adlabs Film” and I instantly liked it. You Know Why?? Because the stock belonged to Reliance ADAG group.
My First Investment With No Research: Adlabs Film
The name Reliance was enough for me to get convinced and purchase shares of Adlabs Film. So i quickly logged in to to my trading account, punched the order and there it was. I had just bought 4 shares of Adlabs Fim trading at 1018 Rs a share on 7th Feb, 2008. I had instantly satisfied my urge to buy something, to start something in stock market but without any research backing me up.
The name of Adlabs Film was later changed to Reliance Media. I still hold these 4 shares which now trade at 59.8 Rs a share (a fall from 1018 to 59.8 Rs a share). If only I had looked at the balance sheet of the company, I could have avoided this. Adlabs was borrowing a lot of money with its debt increasing from 473 crores in Mar 2006 to 926 crores in Mar 2008. Company’s cash flow from operations was negative which essentially means that company was losing cash while conducting its day to day business.
This example from my life is a classic example how amateur investors start to invest without doing any research and then investing becomes more like a game of cards or a roll of dice devoid of any skill in which you are bound to lose money in stock market. So if you have the urge to invest then also develop a habit for research.
2. Not Thinking Like The Owner Of A Business
Imagine yourself as the owner of a publicly listed company say XYZ Ltd. Your company has been performing well financially and just came out with 15% Sales growth and 25% Profit growth over last year’s financial numbers. The stock of your company should have reacted positively to this news. Surprisingly it did not. May be due to vested interests and myriad other factors affecting stock price, the stock fell 10% over the next few days for no valid reason. This can happen if the Big Players want to accumulate shares of your company and they do not want the stock to move up yet.
At this point will you as the owner of this wonderful company panic and start selling shares of your company Or will you pounce on this opportunity to buy more shares from the market?
I have seen that in many good companies that if the price has fallen due to negative market sentiment or for a reason the promoter knows will not affect the company in the long run then the promoter will start purchasing the shares from the market. So while you as an average investor will be busy selling your shares in panic the promoter will we be buying loads of it.
3. Quick To Book Profits & Holding On To Loosing Positions
I recently met a friend of mine. He told me how the stocks he had purchased are now down 67%. I asked him how did he lose so much money and his answer was that as the shares of some companies he had purchased went down he kept buying more of it. Now I had another question lined up for him. What about the profits Bro? To which he replied that in order to recover the losses in poor performing shares he quickly booked profits in stocks moving higher as he feared that the stock may not sustain at those higher levels.
You see. This happens with all of us. Our mind very often gets overwhelmed with Fear and it just shuts down all rational thinking. You should never exit stocks of great companies just because the stock has moved higher. An exit from a stock should be decided based on facts like emergence of competition, technology going obsolete or other valid reason.
Do you know the stock price of a finance company named Bajaj Finance went from 112 in 2013 to 4000 in Nov 2019. Just imagine if you had purchased stock at 130 Rs and sold at 10% gain at 143 Rs. Will that make you Rich? Hell No. A mere 50,000 Rs invested in Bajaj Finance in 2013 would have become a staggering 15 lakh 38 thousand rupees. So Hang on to the stock of a good company.
Just like booking profits in winning stocks is a big mistake, averaging down (buying lower) your positions in a declining stock (if it declines due to a valid reason) is an even bigger mistake. Let us learn more with a real life scenario.
Jet Airways An Example Of Holding On To A Losing Position In Stocks
We recently had an example of this when the stock price of Jet Airways crashed as they piled up debt of 1.2 billion $. If you as an investor did not do your research and held on to the stock and also kept averaging it on its way down then you will be in trouble. Have a look at Jet’s stock price (fell from 855 Rs in Jan 2018 to 21 Rs currently in Dec 2019).
Therefore you should never buy a stock just because it has fallen a lot unless you have done your research. (Image source : tradingview.com)
4. Short Term Thinking & Urge to Make A Quick Buck
Human Mind wants a piece of the reward as quickly as possible. Most of us are wired this way and we are unable to delay the gratification of a reward. This makes us prone to booking profits in short duration of time. For most of us this duration may be just a few minutes, a day, a month and rarely beyond a year or so. This ability to delay gratification and holding on to stocks of great companies is a hallmark trait of great investors. Let me give you a real life example why you should think long term with stocks and learn to delay gratification while investing.
In 2016, I decided to buy shares of a financially sound pharma company that is in to Contract Research And Manufacturing (CRAMS) and was also trying to develop a cure for Alzheimer disease. I had always liked the management of the company as they were quite honest and never gave rosy projections for the future.
The stock had fallen from a high of 320 in 2016 and was available at an average price of 166 Rs around Feb 2017. I decided to buy the shares around 170 thinking of making a quick profit. Soon the stock flirted with 200 levels and I decided to cash out with around 17% profit. Do you know what happened once i sold it near 200?
It first went down to 160 which acted like a spring board. From here it just doubled. I just stopped looking at the chart as it gave me heart burn. Here have a look at the chart (from a low of 160 to 320..334 in around 18 months). The chart is telling you only one thing. Good things take time. Of course there are exceptions but you got to be super lucky to double your money in 2-3 months.
5. Entering At The Peak Of Market Cycle & Exiting At Rock Bottom
Stock markets move in cycles and it is very important as an investor to be aware of where you stand in the current cycle. I have heard from many people that we should not try to time the market but I always believe in having a sense of where I stand in the market cycle. Imagine entering the market at the peak of 2007-8 crisis or entering a small cap mutual fund investing in Nifty Small Cap Index in India in Dec 2017. You could have easily seen stocks fall 40-50% or more.
Entering at the peak and exiting at the bottom is one of the biggest reasons that make people repeatedly lose money in stock market. You buy when the stock market has peaked and you buy stocks with a big portion of your savings only to see them come crashing down within a year or so.
In order to explain this I am going to briefly walk you through four different stages of stock market and show you how an amateur investor does the exact opposite of what should ideally be done in each stage and loses money in stock market. Listed below are Four Stages of a Stock Market Cycle:
Phase 1: Accumulation
This is the phase when there is widespread fear and panic just like the global financial crisis in 2008. As stocks collapse worldwide most average investors see their networth plunge and at some point it becomes unbearable to remain invested. The quantum of loss makes them so fearful that they decide not to enter the markets ever. As the markets bottom out the big boys begin to accumulate shares of great companies at unbelievable prices from amateur investors.
Phase 2: Mark Up
Once the market stops falling as the big investors have been busy accumulating shares in the first phase, stocks become ripe for a sharp increase in price. As an average investor exited all his positions in accumulation phase he does not get to enjoy the sharp run up in prices of good companies. It is the big players who enjoy this ride as they had the courage to invest when everyone was selling.
Phase 3: Disitribution
After market has rise sharply in second phase, the amateur investors get lured in to the market again. As almost every stock is rising at this point in time the euphoria is in full swing and markets are hitting all time highs. This provides courage to small investors and they get in. You can see a lot of new Demat accounts opening up during this period. It is at this time that big investors start reducing their holdings and start selling. Let’s look at an example.
In 2017 all small cap stocks were flying high. Everyone was talking about small cap stocks. The way i gauged the Euphoria was that I was unable to find stocks of good companies in small cap space. If by chance I managed to find a stock to invest then by next day it was already 10% higher. So i just exited all my positions as I became uncomfortable with such Euphoria. As 2018 began the small cap index corrected from a high of around 9850 to current levels of 5743 (40% down from the top). Many small cap funds and investors in small cap companies suffered heavy losses.
Phase 4: Mark Down
Once the big players have distributed their shares to the retail investors they stop supporting the price. Economic news is deteriorating all around and market is unable to trend higher. As the dominoes fall (like the failure of top banks in 2008), the market collapses and amateur investors get trapped.
Therefore if you want to be a rich investor then you must buy stocks of great companies when there is widespread panic and exit when there is widespread Euphoria.
I hope this post about “5 Reasons People Lose Money In Stock Market” was informative and useful to the readers. If you liked the post then don’t forget to share it and do subscribe for more such posts. In case of any suggestions feel free to comment below.
Disclaimer: Stocks named in this blog are only for tutorial purpose. The author does not recommend any stock. Please do your due diligence before investing.
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