Why equity can be brutal for you?

It is a scientifically proven fact that people do irrational things to avoid making losses. One of the biggest fears they have is that of losing money. In fact, studies have revealed that the pain of losing is twice as strong an emotion than the joy of winning. Thus, the emotion felt while losing Rs 100 is doubly strong than that felt by gaining Rs 100.

Human nature is not designed to accept losses. Hence human species’ instinctive or natural reaction to a market downturn is flight, and not fight. However, this brings with it the possibility that investors could miss out on opportunities to generate returns that would help them achieve their long-term investment objectives.

In this article, we will be sharing as the list of the behavior of investor that can make the equity market mortal for the investors. 

1. Not doing proper research and investing based on tips. 

The most common and one of the biggest mistake that investors do is to invest based on the tips received from their friend, colleague or from a financial forum. In most of the cases, the people invest their money based on some hot tip received from some explicit source. What they fail to realize is that the small retail investors sit at the end of the tail and till the time the hot tip reaches them the big players have already made their profit and have sucked the attractive of that security. 

Hence, the only way to invest intelligently is by doing enough research before investing. Moreover, it’s not tough to research the company on your own. Finding an undervalued stock is an art which you can develop with practice and patience.

2. Not Understanding of Market and Market Cycle.

People often lose money in the markets because they don’t understand economic and investment market cycles. Business and economic cycles expand and decline. The boom cycles are fostered by a growing economy, expanding employment, and various other economic factors. As inflation creeps up, prices rise, and GDP growths lows so too does the stock market decline in value. 

Investment markets also rise and fall due to various domestic and global events. The effect of recent slow down in the economies worldwide can be felt on the Indian stock markets as well. Similarly, at the time of demonetization, the market took a steep fall of 7% in just a short span of two weeks but then raise to a whopping 8.3% in just 6 weeks. 

To avoid losing money during a market-wide drop, your best bet is to just sit tight and wait for your investments to rebound.

3. Trying to make money quickly.

Another biggest mistake that people make while investing in the stock market is to look for short cut or head start. People are always in a hurry to make money. They always want to become rich quickly. Always want to be like ‘Warren Buffett’ – Rich and Powerful. However, what they don’t understand is that Mr. Warren Buffett has made the majority of his fortune after his 50’s. It’s a fact that he got more than 90 percent of his wealth after the age of 50 and has accumulated a large sum through his long-term investments for a period of over 5 decades. Success in the stock market needs time and patience.

But this is not how the people invest. They enter the market. Then select a stock which they heard on a news channel that ‘It has a huge growth potential’ and they invest heavily in it. Then they pray that their money becomes 5-10 times. However, it turns out that they lost 30-40% of their investment. So, out of frustration, they quit investing in stocks and start searching for another way that can make them rich quickly. This is how the non-achiever in the stock market thinks and loses money in the market.

4. Letting Emotions Guide Decision Making.

People lose money in the markets because they let their emotions, mainly fear and greed, drive their investing. Behavioral finance the amalgamation of behavioral psychology and behavioral economics explains how investors make poor decisions. The equity market can make you a fortune if you can keep your emotions in control and on the flip side it a can vanish your life's saving if you have an emotional reaction to everything that happens in the market.

People end up taking off their money in panic and fear whenever the market goes down or end up buying at a higher rate due to the greed of making big money in the bullish rally. Instead, the better approach should be not let the fear and greed ride you. Instead of working on panic reactions hold back an analyze the reason for the movement of the market and then make your move.

5. Holding on to the losses while booking an early profit. 

One of my friends was holding the shares of two different companies in his portfolio. the first company was doing extremely well with operating profits and free cash flows increasing sustainable year on year and apt amount promoter holding and other company was continuously falling due to bad management.  what most of the investor would have done he booked the profit in the first company and kept holding the stocks of a second. No matter how correct this approach may seem this isnt the ideal action for such a position. He did exactly opposite of what was needed to be done. 

He thought the loser stocks will get time to recover and he might get his initial investment back. Moreover, in the meantime, he can get some profits by selling his good stocks. In this way, he has limited his upper level and increased his lower level. That is, he has limited how much he can get as profits as he has already sold his good stocks. But, he can suffer even great loss as the loser stocks are still in his portfolio.

The sustainable approach here should have been to hold on to the winners and cutting off his loser stocks.

6. Following the crowd. 

A few years back my one of my colleague bought a distressed stock which looked lucrative due to the change in management and other media hypes. He bought it and the stock showed a small upward really for a week or so and slowly everyone in the office started talking a picking that stock. No one bothered to know the reasons for that movement but since everyone was buying it, they all bought it. 

However, after a month the company declared themselves to be bankrupt and the stock fell tremendously.  But what no who bought the stock at first and started all this buzz in the company has sold all his shares well before the stock started to fall.

If you blindly follow everyone and buy that stock, then you are most likely to lose money. Everyone has some plans and strategies for their investment. You just can’t read the exit strategy of your neighbour. Maybe when you thought to buy, he was planning to sell the stock in a few days thinking it as overpriced. But you just can’t know this.

What you can do is to read about the company’s fundamentals, its financial reports and figuring out why is it in news so much. And after studying the company completely, if you are satisfied, then only invest in that stock. NEVER INVEST BLINDLY FOLLOWING THE CROWD

7. Not knowing Own risk appetite. 

One of my clients increased his equity allocation in his mutual fund portfolio against the stipulated advise of not to do so. But the market at the time of elections look lucrative and he wanted to take advantage of this really. However, after a few months, the market crashed from 12,000 points to 10,800. The client started panicking and this heavy downfall made him very uncomfortable as he and all his life saving invested into these funds. 

Most of the time people aren't aware of their own style and appetite of risk. People tend to overestimate their aggressiveness and underestimate the risk involved and their reaction to those risk.