We hear many stories of an investor wanting to become rich, but losing everything he had. Here’s a case that I recently heard. Mr. Mehta (first name undisclosed on request), age 70, still working hard to repay the money he borrowed to invest in the stock market.
Mr. Mehta first started investing at the age of 48. He started with the amount of Rs. 1,00,000 and invested in companies such as Havells, Wipro, Infosys, etc. He used to buy the shares of companies in the morning and sell them before the end of the trading session. As he puts it, “Investment looked like gambling to me. I used to buy these shares in the morning and sell them off on the same day as soon as the price increased.”
Recollecting his initial days, “Once I made a profit of Rs. 15,000 in a day and this motivated me to invest more.” However, the setback came, when in 1999, many IT companies went bust. Even during such crisis time when he was incurring losses, he used to sell the stocks on the same day itself.”
He says, “I kept on incurring losses, and to recover that, I took debt from my friends and family to make money. I reckoned on penny stocks, and that added to my losses. I lost Rs. 15 lac of my borrowed money. I am still repaying the borrowed amount.”
We discussed Mehta’s case with Manish Goel, Founder-Director at Research & Ranking and what he said was that Mehta suffered losses because he was gambling and not investing in the stock market.
Looking at the example of Mr. Mehta, here is what Manish has to say if the person wishes to invest Rs. 1,00,000.
Rule Number 1. Borrowing to invest
Manish is not in favour of taking leveraged positions while investing in the stock market. And he has an example to mention here. Say for instance, an investor with a capital of Rs. 50,000 takes the loan of Rs. 1,50,000 to invest in a stock. If the stock price falls by 25%, he shall lose his entire surplus. If the stock performs even worse, say falls by 35%, he shall not only lose his capital but also loses Rs. 20,000 on the borrowed money.
Rule number 2. No Intraday Trading
Many reports suggest that investors who get involved in intraday trading barely make any profits. Creating wealth through investments takes time and patience. It is similar to farmers sowing seeds and then waiting patiently for the plant to grow. Now imagine, that the farmer wants to grow mangoes and sows the seeds for it on his farm. The next day his neighbour tells him that apples are better. So the farmer replaced mango seeds with apple ones. Now after a few days, his friend tells him that oranges are the best to sow, so you sow oranges seeds.
In this process, a farmer shall waste his time and even spend money on seeds, fertilizers, equipment with no fruit sowed.
Trading is similar to the above example, and won’t do any good till you give time to the business to grow.
Rule Number 3. Don’t Invest Time In Media News Flow, Invest In Knowledge
Another rule while getting started is to avoid the herd mentality and media news flow. The logic is to invest only in businesses you understand and have conviction in. So if you don’t understand the cement industry, don’t invest in that. Pretty simple! Similarly, if you trust your research or understood the research reports sent by your financial partner and have conviction in the businesses you’re holding, leave the rumours and stay invested.
These are the simple logic to follow. However, many investors work hard in identifying companies to invest.
Rule Number 4. Success In The Stock Market Has To Do More With Emotional Quotient (EQ) Than Intelligence Quotient
I have seen many investors going by the various ratios, technical indicator or algorithms to achieve success in the stock market. However, the same investors, incur losses due to emotional biases such as greed, fear, overconfidence, etc. I am not saying that technical knowledge should be overlooked; the point here is that emotional decisions are often more expensive in the long run. In the case of Mr.Mehta, because he made a profit of Rs. 15,000 once, he further got greedy to make more money.
Rule Number 5. Take The Help Of An Expert
The losses incurred by Mr. Mehta can be attributed to not taking the advice of a financial partner. In the desire to make more money, he invested without the proper understanding of the businesses, borrowed money to invest, lost patience and made many wrong decisions. Remember: There is always a professional who can be a doctor to improve your financial health.
The choice is yours, whether you want to adopt a holistic approach or not.