Indian stock market – Why do people loose money in the stock market By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

September 13, 2016 | Posted by bobbysrinivasan << back to blog

During the sub-prime crisis in the US, the Sensex took a beating. The index dropped from 21000 to 8000. Panic hit the street. Retail investor had no clues about what this crisis is all about and more so as to why it hit the Sensex. This is a conversation between a student and his professor.

Student: I am majoring in fiancé. I am all excited about both the job and investment prospects. But then I am worried about my ability to survive the stock market volatility. What should I do?

Professor: Ofcourse, it is a normal reaction, investor who put their money in the market are similar to parachute jumpers and sky divers. Their fear will be at the maximum the first time around. After sufficient jumps it will become just another dive for them. Their jumping becomes habitual. Similarly for new investors initial entry and exit will always create anxious movements. But after a while he or she will learn to become a long term investor having survived several short-term market crashes.

Student: Professor tells me why do people loose money?

Professor: The losers can be easily identified by their attitude.

First, is the category of people who put their small savings in the market which otherwise should be available to meet their operating expenses. This could for example be the money they need for making a down payment on a house, marriage expenses of a daughter or the capitation fee that is needed to be paid for his son’s education. When the money is required he will exit the market regardless of price thereby incurring losses.

Second, there are nervous traders. Every price fluctuation creates a panic in them. He forgets all the reasons why he bought the stock. In the first place, the volatility hurts his attitude and he realizes that risk taking is not for him. For example he could the same guy who bought ICICI stock at Rs.800 in 2007 then which went to Rs.1240 and later dropped to Rs.240 only and bounced back to recover to Rs.1240 after a couple of years. But he sold his stock at Rs.500 since he couldn’t take the decline in prices.

Third, by the way is the largest number of losers. They don’t understand stock market’s history. They don’t have the intelligence nor the interest. They see the upward movement of the market and hope that some miracle will keep it moving up. He had earlier convinced himself that the stock will continue to move up. A global economic event like China devaluing its currency 1.9% or Brexit pushes down the market temporarily. In one of his anxious moments he sells and takes a loss only to regret later that he should have stayed in the market. A major lesson to learn in the stock market is that one must have the holding power to stay in the market. In 2003 our Sensex was 3000 and in 2016 it is currently 30000. But in between there have seen several crashes and volatilities.

In summary, I have known enough people who have amassed fortunes in the stock market. Their winning is due to the selection of the right kind of stock. Keep investing in them systematically and finally see their wealth increasing steadily over time. Besides they know that the long time capital gain tax is zero. What a way to create and later enjoy wealth. So now you know it. Behave accordingly.

Student: Thanks a lot Professor.

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