The stock market looks like a golden place to build wealth. There are a number of popular stories of the ace investors in India (and abroad) who made tonnes of money by investing in stocks. However, alongside the pros, there are also many ugly truths about the stock market which most successful investors and analysts ignore to discuss.
In this post, we are going to review 7 such ugly truths about stock market which every retail investor should know.
7 Ugly Truths about Stock Market –
1. No stock can give guaranteed returns
Even the ‘bluest of the blue chips‘ can ‘underperform’ and ‘not’ give any return for the sustained long-term time period. There’s a risk involved in any stock that you invest, no matter how safe it might sound.
There are thousands of reasons that may affect the share price of a company. For example- Economy (local or global), industry, Company’s fundamentals, technicals, new regulations, taxes, social and political risks and many more. If anyone is giving you the promise of a guaranteed return, then either he’s not experienced or he’s just lying to you. In the stock market, the best you can do is to minimize the risk by taking calculated ‘informed’ decisions.
“Successful investing is not about avoiding risk, but managing it.” -Benjamin Graham
2. Greed and Fear Run the Market
It’s usual for stock market investors to get caught up with greed and fear.
When everything is doing well – good economy, high employment, government taking favorable decisions, etc, people become optimistic and somewhat greedy. After all, we all hope to make as much wealth as possible in the shortest amount of time. And this leads to mispricing on stocks. Because of the investor’s excessive desire (greed), it becomes difficult to maintain a long-term strategy and stick to the fundamentals.
On the other hand- when things are bad, the economy is not doing well and the market suffers a loss for a sustained long period, then people become excessive defensive (believing the market/economy will continue to decline forever).
This greed and fear drive the market and influences the ‘decisions’ of most stock investors. Although most GURUS will not agree, the truth is that it’s really tough to control your greed and fear to make a sound investment decision.
3. The corporate leaders may manipulate their earnings
Hate to say it, but yes, corporate leaders may manipulate their earnings. This is one of the ugly truths about stock market.
Everyone wants to invest in a fast-growing company. And what can be a better sign of growth than consistently increasing the earnings of a company?
However, when the market starts expecting an extraordinary performance from the company quarter-after-quarter, it puts a lot of pressure on the corporate leaders to meet those expectations. And when they fail to do so, being afraid that their share price may fall down— sometimes they manipulate their results.
There are a number of examples of companies who are found guilty of manipulating their financial statements. The best example (which you might already know) is –Satyam Computers.
4. Would you pay Rs 1,000 for a one-liter packet of milk?
Sounds stupid, right? But this is a common scenario in the stock market.
Most of the people over-pay to buy a hot stock and later end up losing money when the heat is gone. There are many companies who are trading at a valuation way higher than their Price to earnings (PE) ratio even when they are not growing at a decent pace. Overpaying for purchasing premium stocks is a real ugly truth about the stock market.
Anyways, why do people overpay to purchase stocks?
The only time when you’ll be ready to pay Rs 1,000 for a one-litre packet of milk is when you don’t know its real price, right? The same happens with the stock market investors. They buy stocks without doing a proper study and hence, end up overpaying for them.
“Stock market is filled with individuals who know the price of everything, but the value of nothing” -Philip Fisher
5. Over 90% of people lose money in the stock market
This is the ugliest truth about the stock market. Not everyone makes money from the stock market. In fact, over 90% population loses money in stocks.
This is not because the market doesn’t give equal opportunity to all. This is because most people are not ready to put in any time or effort. Given an option- A) Research a company and invest intelligently or B) Invest in a rumoured multi-bagger stock recommended by a friend, most of the people will choose the second option.
6. The ‘Herd mentality’ ruins everything
An investor’s natural instinct goes with the ones of masses, which means that he/she doesn’t seem to have a rational view on a certain investment but is more likely to deviate where the majority mass is moving – this little phenomenon is known as the “Herd Mentality”.
Nevertheless, this never turns out to be profitable for the stock investors. Many of the worst financial crises in the stock market like the dot-com bubble of the economic recession of 2008 can be attributable to the same human tendency- HERD MENTALITY.
7. No one knows the future
Yes, I repeat, No one knows the future. The ugly but honest truth about the stock market.
The top-notch analysts who keep guessing the economic expansion or recession- will ‘fail’ to predict the same when a similar situation like 2008 (where the market falls over 60%) will repeat.
Advisers provide financial advice based on the available information and their experience. If you expect them to predict the future as well- you are deluded, and if they do predict the future, they are. When you are entering the stock market be ready to see many unexpected things. No one knows the future.
Remember what Warren Buffett always used to say —
“In the business world, the rear view mirror is always clearer than the windshield.” -Warren Buffett
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