#6 Sureshot Ways To 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 decline?
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
I think most investors face such issues at the beginning and I too was not spared by the stock market.
My first small investment in stock market was in the year 2008 in a company named “Adlabs Film” (later renamed Reliance Media) which I bought for 1081 Rs and the company eventually was delisted at a price of 61 Rs.
Then again in 2013, I invested 2 lakhs in Caplin Point Laboratories at a price of 20 Rs a share only to see in decline 50%.
Once I sold the stock in panic at a loss of 50%, the stock just launched like a rocket and hit a lifetime high of 783 by August 2017 (a whopping 39 times).
Therefore, the markets spare none. Still you need to take these initial losses and missed opportunities in your stride and learn from your mistakes.
Stung by a passion for equity investing, I quit my job in 2013 and started investing full time. This just added more pressure to not lose money in stock market.
Fast forward eight years in the field of investing after having survived initial hiccups, making initial losses and unearthing quite a few multibaggers, I am still going strong as an equity investor.
In these eight years of experience I have realized that our priority as an investor has to be to not lose money in stock market. Once this is mastered then making money will happen with time.
Therefore, in this article I am going to show you with real life examples, 6 sureshot ways to lose money in stock market that you must avoid.
1. Not Researching Stocks & Investing Based On Borrowed Stock Ideas
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.
Do You Know Why? Because the stock belonged to Reliance ADAG group.
My First Stock 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 into my trading account, punched the order and there it was.
I 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 in 2009. In 2014 the company was delisted from National Stock Exchange (NSE) at a price of 61 Rs a share.
This example from my life is a classic example how amateur investors start to invest without doing any research.
Investing for such people 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 one must find out what does the company do and also be willing to analyze it based on some important financial ratios.
No Willingness To Learn Important Financial Ratios/Parameters
We saw how investing in Adlabs was purely a gamble with no knowledge of its financials. Had I spent some time learning some important financial ratios or parameters I would have not lost money in Adlabs.
If only I had looked at the balance sheet of the company, I could have avoided this blunder
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 meant that company was losing cash while conducting its day to day business
Therefore if you do not wish to lose money in stock market then please do learn a few important financial ratios.
Some very important financial ratios that an investor should know are:
1) Debt to equity ratio, interest coverage ratio, pledging of shares by promoter
2) ROCE, Operating profit margin, Net profit margin, Return on assets
3) Debtor days and positive cash flow from operations as explained in point 8 in link provided here with real life example of Jiya Eco Products Ltd
Just as it is important to know financial ratios it is also extremely important to know a few common ways that you can use to detect financial fraud or financial distress in companies
Lot of cash in current account yielding no interest, delay in publishing quarterly results, opening a lot of subsidiaries, giving loans to these subsidiaries and inflating sales through account receivables are some ways which companies use for siphoning off money.
2. Starting Your Innings In Stock Market With Trading Instead Of Investing
I have seen many beginners getting lured in to stock market by the promise of making a quick buck doing intra day trading (when you buy and sell stocks or vice versa on the same day).
As hard as it can be to predict what happens to the stock price next moment, the beginners also opt for leverage to buy or sell shares.
Please remember it is way better to begin your career in stock market by opting for investing in fundamentally sound companies and keeping your mind open for trading as well.
Trading requires years of experience and great observation skills which can only be developed with time and experience in the market. Trust me you can end up losing a lot of money trading stocks as a beginner.
Therefore as you spend time investing in stocks of good companies you also begin to observe the symphony of stock price and volume patterns. Once you begin to understand the price volume action you can begin to trade in stocks with small amounts.
This also frees you from the constant stress and high tensions that you experience while trading as a beginner.
Trading requires you to act quickly and keep yourself glued to the screen for the right entry or exit point while investing requires you to analyze the company right and then invest at a price point that offers a lot of upside potential.
Once your choice of company is good you can get wealthy by just holding on to the stock for long duration of time. Something like Amazon or Apple. Its a more peaceful way of creating wealth.
3. 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.
Surprisingly stock markets across the globe plunge 20% and the stock price falls 40%.
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.
4. Exiting Your Winners & Holding On To Losing Stocks
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. Are there stocks in which you are profitable?
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, deteriorating balance sheet or some 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 Stock Market
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 deep trouble.
Have a look at Jet’s stock price (fell from 855 Rs in Jan 2018 to a low of 13 Rs in Mar 2020)
Therefore you should never buy a stock just because it has fallen a lot unless you have done your research. Knowing why the stock is falling is extremely important in such situations.
5. Short Term Thinking & Urge To Quickly Book Profits
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 the month of October 2012, I bought first 500 shares of an Indian tableware company whose products are made of opalware glass at a price of 152 Rs.
As the company reported strong financial numbers I allocated 15.5% of my capital at an average price of 292 Rs.
You will be surprised to know that I held this stock until May 2016 and sold it at a price of 2590 Rs a share.
Now imagine had I booked profits only on a 30% or 40% gain, I would have been repenting this decision for life.
6. 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.
This will reveal how you as 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 on the Indian bourses were flying high. Everyone was talking about small cap stocks. I gauged the Euphoria as 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 3482 by Mar 2020. Many small cap funds and investors in small cap companies suffered heavy losses.
This fall in CNXSMALLCAP corresponds to the next phase that is the Mark Down phase.
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 “6 Sureshot Ways To 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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