WHY PEOPLE LOSE MONEY IN STOCK MARKET???

 

In the World of Stock Market  Everyone like to talk about "MULTIBAGGERS" and people who created wealth like Rakesh Jhunjhunwala. 

But tell me Friends what about the failure stories. Every year, millions of people in India end up losing money in Stock Market. But nobody likes to talk about it. 

There is a very good saying, 

"WE CAN LEARN MORE FROM OUR FAILURES THAN THE SUCCESS". 

I would be telling you 7 Common Mistakes and People losing money. Major Human Psychological Factors that are the root cause of all the Problems .................................................................

PENNY STOCK

First Mistake is Investing in Penny Stock. Most people have obsession in Penny Stock. They think that when they Invest in Penny Stock the Downward risk is very low. 

For example, if they Invest in the Stock worth Rs. 5, then they think that most they would lose 5 Rs. per share. But, the Upper Potential Risk is huge. Friends, one out of 100 Penny Stock have Upward Potential, rest all have Downward Risk. And How much you can lose? You can lose all your money. In fact, I ask many people, why they like Penny Stock and many of them said that they like to get High Units. This is again huge misconception. 

For Example, there is a share of Rs.10. Lets call it Share A and there is Another Share B worth Rs. 1000. Now people think that if they Invest Rs.10,000/- , they will get 1000 Units of Share of A and only 10 Units of Share B. So, let's invest in Share. Of course, this is not the right way to Invest. In fact, Share Price has got nothing to do with Valuation. A Share worth Rs.10 still be Over - Valued than Share worth Rs. 10,000. 

For Example, MRF is a classic case. It is currently  Trading at Rs. 86,000/-, but it is still reasonably valued. Yes, it is not Over - Valued even in Rs. 86,000/- per share. By the way, do you know which is Costliest Share in the world? It is Berkshire Hathaway. The Company of Mr. Warren Buffet. Do you know the price of 1 share of Berkshire Hathaway? It is 3.67 Lakh USD. In another words, it is Rs. 2.7 Cr. So, share price has nothing to do with Valuation. Majority of people lose money because they end up investing in Penny Stock. 

Next Mistake is ..............................................

NO IDEA OF VALUATION. 

VALUATION. WHAT IS VALUATION? 

If I ask people, no one has any idea about VALUATION. They just invest because they think that the share is good or if some one suggested the share. My Friend, Valuation is the most important criteria along with the fundamentals of the Company. No matter, how good a share is, no matter how good the future growth potential is. If the share is super - expensive, it won't give you high return in the future. Majority of people lose money because they end up investing all their money in super expensive stocks without looking at the valuation. 

Next Mistake is .......................................

They Follow the Herd 

This is the biggest problem in our Country. Majority of people end up Investing in Companies where their Colleagues have invested, Friends have Invested or Relatives have Invested. 

It is like 

"DOOBENGE TOH SAATH MEIN". 

On a serious note, I have seen many people simply investing on Tips from Friends, Family Member or Colleagues without even knowing anything about the Company. They have Blind Faith. Again, a major reason of Losing Money.

Next Mistake is ...........................

People Look for 52 Week Low

Many people have the tendency to Invest Money when the stock touches 52 Week Low. 

"YAAR AUR KITNA GIREGA", this is their Attitude.

 BHAIYA AUR BHI GIR SAKTA HAI. Majority of people talk at 52 Week High thinking

 "YAAR AUR KITNA BADHEGA". It doesn't work like that. You can't simply avoid the Stock just because it is at 52 Week High or can't simply invest just because a stock is at 52 Week Low. But on the other side, there are also people who just invest Looking at High Returns in the past. They invest when the Company has already given Bumper Return. No. Both the Approaches are wrong. A Stock at 52 Week Low could even fall further if the Stock is fundamentally weak. But if the Stock is fallen to 52 Week Low due to External Reason like COVID and the Stock is fundamentally strong then it makes sense to invest. Majority of end up investing at poor quality stock at 52 Week Low. And a Stock at 52 Week High can either fall or rise based on the Fundamentals of the Company and future growth prospect. 

Next mistake is .......................

 People avoid quality Stock

I don't understand why? But people have the KEEDA to identify the Hidden Gems. 

"YAAR HDFC BANK TOH SABKO PATA HAI... KUCH AUR BATAO".. TITAN, RELIANCE, TCS TOH SABKO PATA HAI, KUCH AUR BATAO.. AISE STOCK BATAO JOH KISI KO NAHI PATA.

Many people lose money in market because they simply avoid the real gems and keep searching for the hidden gems. There is another problem. People not only avoid High Quality Stock but end up investing in Poor Quality Stock and, when their Share Price Fall they invest even more to average out their price. Friends, this is a Recipe of Disaster. 

Next mistake is They end up investing in Day - Trading and Futures and Options. Many people want to make quick money in stock market. As a result, people end up doing Day - Trading and even invest in Futures and Options. Friends,  Day - Trading is not every one's Cup of Tea. You need to be Professional Trader. Many People lose their money in Stock Market because they end up investing money on Day - Trading and specially in Futures and Options by buying huge lots on Leverage and even on Borrowing money from others. When they lose money they invest more with a hope to recover their lost money. And end up losing even more. 

Next Mistake is ................

People never learn from History

For Example, if today Sensex is at 50000 people think that it will only go up. But my Friend, if you look at the History you would know that if the market rise, it also falls. And when it falls it eventually rise. People today are going towards Technology Stock. They are willling to buy Technology Company at any Valuation. I am not saying that they are bad. But if you look at 2000 Dot Com Bubble, there was a time where every Internet Company was attracting Super Expensive Valuation even without any Profitable Business Model. Eventually the Bubble burst and people lost money. So, don't just invest in a Company because it is a Technology Company. Look at the Financials, Business Models and of course, the Valuation. Likewise, Today everyone want to apply for IPO's, every IPO. "BHAIYA AISA NAHI HOTA HAI". Not every Company that goes for IPO is good. Investing is not a Science. There is no Fixed Formula. It is more of an Art. If investment was all about Financial Numbers, every Finance and Economic Professor would be a Millionaire. The biggest factor that decides the Success and Failure of Stock Market is Human Psychology. 

Thrill

People need Thrill.

Let's understand the Human Psychology. If I gave you two Option of Investment. First, Nifty 50 Index Fund that can give you an average of 10 per cent Average Return for Next Average 10 years V/s Second, Active Mutual Fund that can even give 15 per cent return or can also give 5 per cent return. What would you choose. Majority of people would go with Active Mutual Fund because if you know an Average 10 Per cent Return, then there is no thrill. On the other side, even if there is a slight chance of 15 per cent return, then you want to take that chance even though there is huge downward risk. This is the reason why Index Funds are not so popular in India. 

On the other side, If I tell you, that a stock can give you average 20% return for the next 10 Years V/s a  Stock that can either give 100% Return or can also give you negative return. Then Majority of People would go with Option 2. 

I want to Share a Story when G Pay became famous. When G Pay hit in India, People used to Transact with PAYTM. So, earlier PAYTM used to give Rs. 100 or Rs. 200 as cash-back which can be used in another Transaction. But Google Pay did something Extra - Ordinary. Do you know what was that. The Problem with PAYTM cash back was that people already knew the amount they would receive. So, there was no thrill. Google Pay introduced a Scratch - Card System. So, you make the payment and get a Scratch Card. Now this was a Billion Dollar Idea. Since, people didn't knew the Cash Back they would receive, it created  a thrill in their mind and Google Pay started by giving good Cash - Back. So, if someone make a payment of Rs. 500 and got a Scratch - Card with a Cash - Back of Rs. 100, the person was thrilled. He did not expect this. This releases DOPAMINE in the body which is the Hormone responsible for the Happiness. So Dopamine is also known as "Feel-good" Hormone. So, it started sharing its Google - Pay Experience with Friends and all over Social - Media.

 Instantly, Google - Pay became a hit. Infact, the strategy was so brilliant that it would cost Google Pay less than PAYTM CASH BACK because later Google Pay reduced the Cash Back on Scratch - Card and many times Scratch Card would show BETTER LUCK NEXT TIME. Still there was a thrill. And friends, you must be wondering Google Pay guys must be a Genius. This Concept is nothing new. Humans have always been thrilled by these Scratch - Cards. And hence concept of Lottery has been prevailing in our society for 100's of years. It is just that Google Pay has made an Online Version of it. Later, PAYTM also followed the same strategy. In fact, this Dopamine is the main reason why people are glued to social media. The urge to get instant gratification with someone liking your photo.of your photo. Anyway, if you want thrill please visit Goa or Vegas. Real Investing is boring. It is like watching paint getting dry or watching grass grow. 

Next reason is ....................................

 Greed

This is again big problem. 

"YAAR 10 PER CENT WALI NAHI, 40 PER CENT WALI COMPANY BATAO". Greed is the reason people end up investing huge amount of money when the market is at top. Greed is the reason people end up Borrowing money to invest in the stock market. Greed is the reason people end up investing in penny stock. Greed is the reason people end up doing Day - Trading and Futures and Options. And greed is the big reason why people end up losing money. 

Next reason is ...........................

 Lack of Patience and Discipline 

"YAAR AISA STOCK BATAO KI 6 MAHINE MEIN PAISA DOUBLE HO JAYE". This statement sums up the mentality of majority of investor. Everybody wants to get rich, but nobody wants to get rich slowly. If you study Warren Buffet, he became a Billionaire at the age of 56. But majority of people lack patience in investment. In fact, if they invest in the great stock and mutual fund and it doesn't give return in next few months, they end up selling it. Because, they simply don't have the patience. 

Discipline to invest systematically at various level inspite of market volatility. Discipline to stay invested in the market. It is not easy. And the majority of people lack discipline. 

Next reason is they can't handle the pressure - Friends, you need a lot of conviction to go against the wind and stay invested when the market fall. Or infact, invest even more during the fall. But Conviction, comes only from knowledge. That brings us to the final root cause which is Lack of Knowledge.

"YAAR SIKHNA NAHI HAI.. BAS TIP DE DO KISME PAISA LAGAYE". This is again a major Culprit in people ending up losing money. Unfortunately, Money Management is not a part of school curriculum in India. Nobody, teaches it. Nobody likes to discuss about it. JOH HONA HAI, HONE DO. No wonder. Every year millions of people in India end up falling in various financial traps and destroy their financial life.