If we look back our life, we can see how our though process has evolved over time.
Many things that we did then look like kids play now.
When we were young, we will be fearless and adventurous.
Like speeding in motor bike, hanging out of the bus - we take risks without realizing the serious danger in it.
But as years go by, life teaches us lot of lessons.
What we did not understand when someone advised, we will learn it thru experience.
The knowledge of fire hurting us is different from actually experiencing it.
The one who learned by experience will be extra careful when it comes to fire.
Stock market is same as well.
Though we have the knowledge of dangers in stock market, up until we experience it, we will realize the seriousness of those dangers.
Instead of waiting till we experience it, if we learnt from others experience, it will put us many steps ahead.
So in this episode, we will see about the typical mistakes made by beginners in stock market and how we can avoid them.
Without knowing the difference between speculation and investment, playing in stock market like in a casino is first mistake.
You are asking what is "Speculation"?
Not all money that is put in stock market is investment.
We have to understand that first.
If we a financial instrument based on a chance, on a gut feeling that the price will go up in the future blindly without any facts,
that is what is called as "Speculation".
That is, speculation is very close to betting on black in Roulette game in Casino.
"Everyone is buying - let us buy as well, Last year the return was stellar - it will be stellar this year as well"
thinking like that assuming that it is investment and buying following a crowd blindly is pure speculation.
In short, if we don't know or don't understand a product, then we should not be investing in it at all.
If we do that, then there is no much difference between that and gambling.
For example, lets take Bitcoin.
"I do not know anything about bitcoin. But everyone is saying that it is the future currency...
"They are also saying that the value of 1 bitcoin can go upto 1 Million dollar...
"its price has also shot up in recent times... so I am going to invest in it"
Justifying like that and buying bitcoin is not investment. That is Speculation.
I am not saying "Do not speculate". Just saying don't do it thinking that it is an investment.
There is nothing wrong in using a small % of our portfolio for speculation.
But do it knowing that it is speculation. Doing it thinking that it is investment is what is wrong.
Second mistake is Timing the market.
"Market will come down, we can buy it then"
or "Market will be going down. Lets sell everything. We can buy back later after it has gone down"
Like these, trying to guess the behavior of market and taking action based on that guess is called "Timing the Market".
But in reality, no one can consistently predict the market movement.
If anyone says that they can predict it, stay at least 10 ft away from them.
Because they will share only the couple of times they were right in predicting. But will not share the 100 times they failed to do so.
Even a broken clock will show the time right two times in a day.
So if you hear any market prediction from anyone, just hear it as an opinion rather than fact.
Do not take it seriously and buy/sell your portfolio.
If you have money to invest, just keep buying the asset that you would like to invest every month consistently.
Buying cost will average down.
Do not wait for a better time to buy. It may never come.
Personally, I always stay invested. Never sell anything.
If I feel that the market is bit expensive, I might delay any new investments.
But trying to time the market anything more than that will be a futile task.
If we try to time it, what happens is, we will sell that the market is going down.
Thats when the market starts going up.
After it goes up by 10%, we will buy again as we are missing out on gains.
Thats when it starts going down again.
By trying to time the market, we have doubled the loss to be 20% instead of 10% market loss needlessly.
During 2008 financial crisis, I know many personally who sold all their assets when the market came down by 40%.
But in one year, the market recovered from those losses.
Because of selling at the wrong time, their overall return took a big hit.
The lesson from this is, "Just stay invested".
Don't even attempt to time the market. Because, it very rarely works.
Taking a decision emotionally rather than rationally is third mistake.
Not in just investment, we should try to avoid this mistake in our life as well.
In any decision, we should train our brain to remove the emotion out of it and make the decision logically.
It is easy to say. But it is very difficult to follow.
Because we all are human beings. Not robots.
So it is bit challenging to remove emotion out of decision making.
But in practice, we can do it.
Lets take Tesla for example.
Just in last one year, it has gone up by 500%.
"The price is keep going up. Everyone I know holds Tesla. Its just me who is missing out on all these gains"
thinking this and if we buy out of "Fear of missing out" - that is emotional buying.
Emotion like this will lead to the first mistake - speculation.
Also when the market crashes, if we sold all our assets as if the world is coming to an end - that is also an emotional decision.
Not saying to be not scared. But we should not be reacting for every market downturn.
As we saw in "recession explained" episode, we should realize that this is part of growth cycle and shall pass as well.
We should not react to each and every news in Tv and News paper.
Traders do that. Not investors.
That leads to 4th mistake. Trading in Stocks instead of investing.
I am not saying trading is wrong. But to be a successful trader, it needs lot of knowledge, skills and experience.
If we assume that we are a great trader after couple of trades in the stock market, eventually it will catch up.
It will definitely destroy us in a way that we would never return to stock market.
We are seeing many successful investors in the market. But are we seeing that many successful traders? We have to search for them.
Because it is not that easy to be a successful trader.
It is also a very stressful work.
Recently I saw in a video - that trading is like putting a bullet in random slot of a gun and shooting ourself.
He said it right. Even though the chance of shooting is 1 out of 6, when it hits, the death is for sure. Can't get out of it.
So don't join a trading course in anticipation of learning all the techniques and implementing them in short period.
It will end up as a disaster story.
Saying that, if you are really interested in trading, try it out with 5% of your portfolio.
See how consistently you are able to beat the market.
Instead if you try trading with all your portfolio, I can tell you now, it will end in tears.
The chance to win as a successful trader is less than 5%.
That is 95 out of 100 are losing their money in trading.
So before trading, ask yourself the question whether you are in that 5%?
Then ask the question of whether this stress is work for that 5% success rate.
Then decide for yourself.
Trying to beat the market is next mistake.
We already saw this in "Stocks Portfolio" episode.
The chance of us beating the market by investing in individual stocks is very less.
For most majority of us, investing in Index fund is the best option.
Even though our brain knows that, the greedy part of our heart does not know it.
It will make us buying individual stocks and try it out.
If you are trying that out, at least do this.
Before buying a stock, come up with a list of reasons on why you are buying it.
The reasons should be in such a way that you can monitor yourself without depending on others.
The business is growing well, sale is growing by 30% year over year, there is no competition in the market, Good Management
like these the reasons could be anything.
Do not buy because an analyst recommended or someone recommended in Youtube.
If you can do your own analysis and if you can take a decision yourself, then only consider individual stocks.
If you ask me, I would recommend you to focus only on Index funds or other mutual funds when you start investing in the stock market.
You can consider individual stocks after getting 3-5 years of experience in the market.
So far, we have seen 5 beginner mistakes.
We will see about the next 5 beginner mistakes in the next episode.
What have you seen other beginner mistakes in the stock market?
Say it in comments below. It will be useful for others.
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We will meet again soon in the next episode. Thank You.