Stock markets are known for their volatile moves. If there
are abnormal returns, there are abnormal risks also. But in spite of all the
risks involved, it is the only place which can give exceptionally good results,
if handled properly. So, what are those top reasons because of which one loses
money in stock markets. Experience shows that market volatility is NOT the top
reason for losses in stock markets. The so called black swan event occurs once
in a while but traders lose money, almost every day! Let’s see why it happens.
REASON
NO 1 - IRRATIONAL EXPECTATIONS
Talk to any new trader. What is his expectation of monthly
returns from the market? If he is not an experienced trader, he will say I am
happy with 25% returns per month. Now, for him this is a very very normal
return because he is treating stock markets not like a business but a place to
get rich, quickly. This very expectation will force him to trade in such a way
that he will lose almost everything in few trading sessions! Yes, his lose is
somebody else’s profit. Now even 10% per month means you are doubling your
money every ten months!
Show me a business where you can do this. Show me a business
where you can even get 50% returns every year. Extremely difficult. So, if we
have highly abnormal expectations of profits from stock markets, we are BOUND
to lose money. Because than, we will be enticed by so many SHARKS in the market
promising moon with their so called research and software. Ask them, if they
are able to generate such returns, why should they share their research with
anybody else. Why then all the big business houses will do anything else?
So, we need to keep expectations that are achievable. And our
experience shows, that if you are good with your strategies, 4 to 5 % monthly
return is achievable but that doesn’t mean it will be consistently there for
all 12 months! Still there will be months when you are not able to achieve
this. Hence a yearly target of anything between 24% to 40% can be termed as a
rational expectation. Yes, still it is very high compared to your fixed deposit
in a bank.
And in the end, we will share a calculator with you which
will show you, where will your initial investment reach in ten years from now, even
if you achieve 24% returns per year.
REASON
NO 2 – SHORT TERM VISION
There was this client who enrolled for our guidance for
derivatives market. After the closing of first day of trade, this person had a
loss of Rs 75 /- in his overall account of approx. 5 lakhs. He called us and
was sounding really nervous. Next day morning, when markets opened, he was in a
profit of around Rs 300/-. We immediately asked him to close the trades and
forget about trading in stock markets for some time. This is a real life
example and this same person is now (almost after three years) one of our
biggest clients.
Three years back, he was a trader who will panic even at a
drop of hat. Now he is a mature, experienced trader who can take nuances of
stock trading in his stride.
We must know, what are we trying to do with stock trading or
derivatives trading. Is this like a fixed deposit in bank account wherein my
money must grow every 24 hours – whatever small is the growth?
No, this is a place, where you require lots of patience.
‘Stock market is a device to transfer
money from the impatient to the patient’ – by Warren Buffet.
Think of a business man who has started a new business. He
need to set up lots of things before he gets his first penny as a revenue forget
about profit. Think of all these big ecommerce guys setting up their businesses
and accumulating loses for years before they make their first profits.
McDonalds was there in India for almost first seven years without any profits.
But these are visionaries. They are not here for a day or a
month or one year. They have long term vision for their business and they will
try everything before they give up – in case they give up, ever.
I am not saying we should also keep on accumulating loses
after loses! No, but we should not have such a short term horizon for making
money in any business. It doesn’t work that way at all in stock markets also.
That’s why many times we hear this ‘most of the weak hands are out of market in
recent volatility ‘. Do not become a weak hand who can be
manipulated by market makers. Have a sufficiently long vision, so that there is
no psychological pressure on you – the toll used by market manipulators to
throw you out!
REASON NO 3 – NO STRATEGY / PLAN
IN PLACE
Stock market is no more a casual occupation. We need to have
a proper strategy in place to create any meaningful wealth. Strategy which is
able to capture not only short term gains but also capture long term capital
appreciation for your money.
If you have entered a trade without any plan on when to do
any adjustment, when to book profit or when to exit the trade, this is not
strategic investment. This is casual trading and when all the other traits of
overall economy are becoming extremely tough, it becomes equally difficult to
get positive returns from stock markets. So, trade without any strategy in
place, it becomes a sure shot recipe for losing money.
Strategy as such is a word taken from military. Strategy
means that I am ready to take care of my position with whatever limited
resources I have. I don’t know whether the enemy will attack me from left, right,
front or back but my strategic positions will take care of attack from any
side.
Similarly, in stock markets, I should hedge my positions in
such a strategic way that I need not panic for any kind of moves of the
markets, which in case will always be there.
REASON NO 4 – GRAB THE NEWS &
PREDICT
Glue yourself to TV screen and be rest assured, you will
always lose money. A friend mine subscribed to a so called ‘insider’ for
getting information about the market movements by paying a huge sum of money
for one-year subscription. Now almost four months old, he is very clear about
what to do with this information. At least to save his capital, he has stopped
trading at all!
Every morning you have experts competing with other for your
attention on different business channels. Try to follow them, you will come to
know what is happening. Every other person is expert in predicting where the
market will go.
‘If it goes by another 50 points from here, it
is a bullish signal and it will touch 9000, and if it goes 77 points down from
here, it is very bearish signal and it can touch 6900 !!’
Whatever happens to market, the expert is
always right.
Do you think a normal retail customer will get
the news before it is played out? No chance at all! Show me a person who has
created any meaningful wealth by doing intra-day trading. Think about it. Who
is gaining by your intra-day trading? You or some-body else!
Use whatever charts, software you want to use
for predicting the direction of market, more than 50% of time, you are wrong.
Why to waste your energies on something which you are sure, that it will be
wrong 50 % of times?
Why should I be acting as a puppet in the hands
of so called experts having opinion on each and every stock and each and every
aspect of market?
No way I am denying the capability of some
really genuine guys out there, who are giving fair view of overall situation,
but they are very very small in number. And in the overall jungle of marketing
gimmicks, difficult to identify them.
REASON NO 5 – NEVER INVEST IN
YOURSELF
We love to give advice and we love to take
advice as long as it is free. But please check out. What is the cost of free
advice in stock markets?
It is
huge. Cost of free advice is the huge lose that piles up in our accounts. No
one is responsible for that because it was delivered free of cost. But still,
unless and until we burn our fingers severely, we keep relying on the free
advice of our intelligent colleague, smart neighbour, old friend, an insider of
stock markets, our brokers and the list can be pretty long.
We regularly get phone calls from people from different
parts of country, saying – I have lost huge amounts of money in stock markets, I
want to learn hedging techniques, I want to learn positional strategies, but I
cannot afford to pay.
Is it true? It is not that we cannot afford to
pay. We still do not want to invest in sharpening our own axe. We do not
believe in acquiring new skills which require some effort-mental, physical and
financial. We don’t know what we don’t know. The unknown unknown box is pretty
big.
But then there are hardly any low hanging
fruits in these markets. A very successful person shared with me – ‘I always
buy and read lot of books. Even if I get one good sentence from a book, the
cost of book gets recovered. This is my investment on myself.’
