How (NOT) to make money from Stock Markets

Stock Market is undoubtedly the best investment vehicle around. The high return albeit a little risky route for making your hard earned money for you. But, the way they behave is erratic so to say the least. You will find so many people bad mouthing the markets with one liners such as:

• “It is a gambling machine where you make coins and lose rupees”
• “It is the playground of big(filthy rich) people”
• “Markets are more unpredictable than girls”

I am sure there are more. But, is there any truth in the allegations? Yes, there is a slight unpredictably in how the market functions and manipulations do happen with the so called big sharks playing their dirty cards.

However, the Stock Markets are not the ones to be blamed.

For the sake of simplicity, lets compare the Stock Market with a SUV. They are fast, uber cool and give the driver a rush of adrenaline. But, will it give the same pleasure to someone who does not know how to handle the powerful engine that a SUV has or does not have the zeal to test its true potential on rough terrain? The answer is a big NO.
The reason is simple, “It is a misfit”.

Hard to digest, but that’s what all the people are who bad mouth the markets. A clear misfit.

Without further ado, here are some of the ways you can (not) make money in the stock market. I should clarify at the onset that my idea of a stock market investment is a medium to long term strategy which focuses on increasing capital and not fast gains.

Stock Markets are (NOT) a Get Rich Quick Scheme

This is one thing that lures early investors to the Stock Market. A friend / relative makes a quick buck in the Stock Markets and he / she becomes the holy angel telling everybody about the latest Get Rich Quick Scheme – “The Stock Markets”.

If you have a friend/relative like that and you can get influenced by their views, you are definitely (not) going to make money from the Stock Market.

I should (not) follow the best equity advisors on TV/Internet

If you thought you scraped through the first one unharmed, this one is surely the way to have your investments turned into sand. I have nothing against the so called equity experts but a blind faith in their opinions is the sure-fire way to burn your investments to pure ash. The so called equity experts have their own rationale for their advice and that need not align with your profile. Moreover, there are always some personal motivations running deep which influence their picks.

I could almost do another post on this point alone. But the idea is, “Following Equity Experts blindly does not work in Stock Markets”.

I (do not) need to set any Investment Goals

This is the big daddy of Equity Investment debacle in general. A tendency that there is hardly enough investment to set goals is a disaster waiting in the wings. If you thought Investment Goals were for people with lot of money invested, think again. How can you expect to make money in the Stock Market if you do not know how much you want to make. I never put down any investment goals and as a result, I never knew when to place a SELL call on my holdings.

Have clear and reasonable goals documented somewhere and decide the Target BUY price, Target SELL price and so on. It will atleast help you avoid those huge fluctuations in the market when there is too much speculation.

The Stock I am holding has come down to half their price, but they will rise again*

This is one simple reason to have your wealth eroded via the Stock Markets with a ‘*’. Let’s consider that your buying decision was well researched and the company fundamentals still look strong. The idea here is that some stocks have a lot more than fundamental play riding on them. They are momentum stocks and cyclical in nature. So, it is always suggested to Cut your losses and Keep Cash Handy.

Cash in hand will give you an opportunity to re-enter at lower levels and make profits when the markets are going good. Believe me, there is nothing like seeing Green in the portfolio.

* If you have bought in a stock like L&T at high prices, the above may not hold.Some stocks are worth passing generations and short term losses should not bog you down.

I should (not) buy in bulk to ensure maximum gains

This is one ideology that is both true and rubbish at the same time. True, since it saves you a lot of money on the Transaction Costs and moreover, the gains based on per share basis make it a good strategy to buy huge chunks as and when possible. But, do we keep a little buffer cash to invest more should the shares go down for short term. If you don’t then it is calling for trouble. Always buy shares in a reasonable and suitable lot based on the cash position. Even if the share in your portfolio is a potential multi bagger it can go downhill for sometime. Keep some cash handy to increase positions in the share by buying at low prices.

Come to think of it, I can go on writing a book on ‘How (NOT) to make money from Stock Market’. But, as of now these were some things I thought are the biggest mistakes that we (or mostly amateur investors) make while investing in Stock Markets.

Would love to hear from readers on How (NOT) to make money from Stock Markets :)

Disclaimer:: The views expressed here are my own and should not considered as an Investment advice.

PS: If you have noticed, my bio at the end reads “Stock Market Stalker”. For those of you who wondered why I never write about Stock markets barring a bit in the Finance Friday Digest, the title and the post should answer it.

[This post is written by Ankit Agarwal, an ERP Consultant by profession, a wannabe entrepreneur and stock market stalker by passion]