Stock market is the place to create wealth not to earn money, we need to understand the difference here. Stock Market cannot be treated something like a business or any other salaried profession, because you cannot rely on Stock Market to generate consistent Income month after month.
Most beginners who tried their luck in stock market quit in few months of time. The average duration of first time Trader/investor who come to the markets are less than six months. That is if they fail to make any profits during first six months period, they call Stock market as gambling and quit. Because their expectations were wrong, the came into markets expecting to make some quick profits or secondary source of Income by trading part time.
Stock Market is the only financial instrument that can create enormous wealth which is completely liquid. Anyone who have Crores worth of properties cant liquidate their assets over night, because its hard to find the buyer who agrees to your price, more over all the paper work involved in real estate makes it harder to transact.
Look at two of the greatest Investors in Indian Stock Market, Radhakishan Damani and Rakesh Jhunjunwala, India’s second richest person created his fortune through markets.
Let’s look at the last 5 years net worth chart of Damani and Rakesh Jhunjunwala, Rakesh net worth increased from 10,000 Crores to 16,000 Crores and Damani’s networth increased from few 100 Crores to One lakh forty thousand crores after his D-market listing, and such growth happened in spite of two big events in last 5 years demonetization and Corona Pandemic, market sell off happened, where Rakesh Jhunjunwala lost almost 30% of his net worth, which is almost 4500 Crores.
Imagine losing 1000s of Crores , which was of course notional loss, but most of us panic seeing our Rs.10,000 investment going down to Rs.8000, where we couldn’t handle the 2k loss, where we end up revenge trading and trying to recover 2k that we lost, in the process we end up losing all our remaining Rs.8000 capital.
But both these investors held on to their stocks even after losing 30 to 50% of their capital. Why should they do it? Because they have the conviction in the companies they have invested in, whereas we do not have that conviction because we never do any research before investing in a company. In fact, most of us do the research about the stocks after we make the investment.
What was last item that you bought online? Whatever it may be, once you decide that you wanted to purchase an item, first thing we do is, go to flipkart or amazon and check the reviews of the product that we intent to buy
After all the research/reviews, once you get that confidence you go ahead with the purchase, there would never be an instance where you started to research about the product after you made the purchase.
If we are spending so much time on researching about the unwanted items, why we are not bothered about researching more when it comes to investing our hard earned money? We mainly rely on friends or other experts who suggest some stocks, and we blindly invest based on their recommendations.
But if stock price drops, we panic and exit from it. We can buy recommendations but can never buy conviction to hold on to that stock.
We all know about Warren Buffet, Rajesh Jhunjunwala and how these investors made tons of money, but hardly anyone knows about this guy Jim Simons
A mathematician who solved the markets. Unlike other great investors, Jim Simons focused on short term trading, he run a hedge fund called Renaissance Technologies where their Medallion fund has made consistent returns year after year since 1988. How could he able to achieve that?
Its purely because of Data, they crunch large data sets and try to find historical patterns and see if they find any anomalies, as per Jim Simons, markets do move in random, but there are certain patters which keeps repeating over and over, when they find such statistical significance , they bet their money on it. From 1989 to till date, their hedge fund has been minting money , there was never a year which ended up in negative. In fact, when whole world markets were bleeding in the year 2000 due to dot com bubble burst, they made 100%+ returns and the year 2008, global financial crisis they made three digit returns.
So with Stock market, there are people who made fortune through long term investment and there are people who made billions trading short term. It’s not that only long term investment works, people who say that failed to make returns over short term. Opportunities are there in both long and short term.
If you are really serious about Stock Market you should follow these 5 important principles
- Consider Trading and Investing as two separate avenues, just because a stock that you bought last week went down this week, do not convert that as your long term investment. Most of the beginners do that, they think it would eventually recover, why to book loss now, lets better wait until it gets back to my purchase price, but that might never happen, you would be left with dead investment.
- Never borrow and Invest in stock market, invest only the money that you can afford to lose.
- Be it investing or trading, you should have proper rules/approach/system whatever you call that. If you are making random trades, random investments just based on newspaper and TV channels, your results will also be random, at times you make profit most times you end up losing. So following a proper trading system / investing rules is a must.
- Always remember Equities create wealth, Gold is for ornaments , Insurance is for protection, Fixed income is for regular income and Real estate is for a home. Simple rules. Makes the entire process of investing easier.
- Stock always goes up is a myth, not every stock out there keeps going up. Even if you want to stay invested for 10 – 20 years, you must have a exit plan, know when to exit from the stock. Remember what happen to so called good fundamental stock Yes Bank and DHFL? Of the 30 stocks that are part of the Sensex today, only seven were in the Sensex in 1992 — ITC, Larsen & Toubro, Mahindra & Mahindra, Reliance Industries, Tata Motors and Tata Steel.
It all depends upon how you approach the markets, If you don’t bet, you can’t win. If you lose all your chips, you can’t bet. So if you try to make it big with just one trade, that never going to happen, trying that will only do more harm. Instead focus on the process. Wealth will eventually follow.