Why investors lose money in equities?
There are too many reasons why “investors” lose money in equities. Here I am trying to enumerate some of them. Keep visiting this post because as I get more points I will add them here rather than create a new post.
1. Confusing between trading and investing: Traders and investors both make money if done professionally. However most retail investors do not know whether they are traders, investors or speculators. So if they lose money in a trade they do make the same mistake again, and again. Professionals learn better than retail investors.
2. No asset allocation: Normally they have never enumerated all their assets and liabilities. There is an easy way to do it today – just go to websites like moneycontrol, valueresearchonline, etc., and enter your portfolio and know how your assets are allocated.
3. No portfolio construction knowledge: Just buying a few shares is not a portfolio. I recently came across a person (he considers himself successful as an investor) who had put all his equity portfolio (40% of his net-worth) in 2 companies (both of the same group). I was aghast at his portfolio, but as he had made a lot of money, he thinks it is the best strategy.
4. Not doing enough research: In your whole life you need to pick and hold about 50-60 companies. However to reach this figure you may have to look at say 500-1000 companies. If you are assuming an investing life of 40 years, looking at 1-2 companies a month is not difficult. Most retail investors are too lazy to do it.
5. Watching TV watching television is not a bad idea. Problem is when you listen to the sound bytes, believing it and acting on it. Do not think of business channels as your “financial guru”. They are not. They are here for entertainment.
6. The money that an investor makes (or loses) is a function of market behaviour and investor behavior. Markets are far, far easier to predict. Investor behavior is impossible to predict. Most investors cannot put a rationale to their own action, once the action is over.
let me add some more later on,,,,,,but you must read this
sukumaran
Nice post. Do you believe that a retail investor should invest only through a fund manager? Most fund managers today have not seen a bear market or a recession. Will they be able to handle a slow, dull, boring, not going anywhere market – forget a bear market? I recently met a relationship manager of a mnc bank who promised me a 50% return in an equity fund. Am worried about his classmate who could be a fund manager! How do we tackle such guys who have become F Ms just because there is a shortage of people? It gives me the creeps.
Prabir Sharma
There involve sentiment with money & not to seeing rationally.
These two factors are making him loser.
Sharad Singh
nice one. Cognitive dissonance is a great concept. If we could get over ourselves, we shall be richer 🙂
Wrote something on why we lose money at bit.ly/1177pe7
Deepak Joshi
Very Nice Blog .Keep up the good work
Narasimmamurthy Radakrishnan
Recently a part of portfolio dedicated to ” an analyst,advisor” is down 30%. I decided to dedicate the loss to him.( as many as 8 counters – all in loss ) Is there any name for such behaviour ?