Previous : LIES, LIES AND DAMN LIES-2
Investment avenues discussed so far have risks beyond the full grasp of by ordinary investors. They have very little idea about how to protect their portfolios in the event of a market- crash. Quite often they enter the market at the wrong time and exit too at the wrong time. Lured by reports about people having made huge amounts of money from stock market, some people buy stocks at a time when stocks are on the verge of a deep correction after a big bull rally. The mistake here is the wrong timing. Some times an investor waits for a recovery after a big fall to exit his stock bought at the highest price. After a long wait he gets fed up and fears he will lose all his capital. So he exits probably at the bottom of the fall and finds to his dismay his stock recovering to its full glory once he is out of it.
It is not true that people have not made money from stock markets. But a majority of the investors are losers due to the way they are investing. First of all they have no idea at all about the need to buy quality stock at high prices. They buy cheap–quality stock at the recommendations of others. Most of the stocks they buy are penny stocks and these stocks rarely reward the investors in the long run. Ordinary investors never understand why a stock is going cheap and they never go for expensive stock. They believe in numbers rather than quality. They also have the tendency to trade rather than remain invested for long. Nor do they get out when the going gets tough. Most of the stories of people getting rich overnight from stocks are false propaganda made by people with vested interests such as brokers to lure innocent people into this game.
Day trading or trading for a short term is another big folly people indulge in. It is quite irrational to think that people with no special skills can make money by trading stocks on their intuition. Even the brightest of the lot will lose in the long run because it is statistically impossible that more than 50% decisions out of 1000 decisions taken by a person can become correct. Most of the short-term traders keep the shares they could not dispose of for a few days if they find it difficult to get out of them with profit on the day of buying. Sometimes they may be able to exit the stock with profit. More often they will be forced to hold on to them for a considerable period of time. Their capital gets stuck. Ultimately a short-term trader will be stuck with bad stock when he gets out of his good stock with small profits. Ultimately all his capital will be lost in worthless stocks.
Ordinary investors forget the sad truth that every trade involves two people, a buyer and a seller. When a person sells a stock he must have his reasons. The same will be the case of a buyer who buys a stock .He must have his own reasons too. Subsequent market action proves one of them wrong. Ordinary investors are mostly lured to buy a stock getting information from newspapers and other media. Sellers some times plant news favourable to the company’s from which they want to exit. Some analysts also advise investors to buy stock after being bribed by parties who want to be rid of certain stocks.
This happens often with new share issues. These new issues are called IPOs (Initial Public Offers). Promoters of these companies want to get their issues subscribed fully. They employ paid writers and put up attractive advertisements to lure the unsuspecting public to subscribe to their issues. Once the shares are in the investor’s portfolio it is luck that matters more.
Therefore all the talk about people making money from investing in stocks or trading in stock should be taken with a grain of salt. Long term investors with idle money may get rich if they are lucky in their choice of blue chips. But every investor may not be lucky in his choice because no blue chip company remains a blue chip forever. Just think of people who invested in GM, AIG and Enron and what happened to their long-term investments.
WILL BE CONTINUED…
CYRIAC J. KANDATHIL, Chief adviser, www.AssuredGain.com