Monday, 26 May 2008

Popular misconceptions about the Stock Market

Somebody said "Information is a bliss". If you haven't heard of it, then simply take it as my quote. Its true.

About 10 years ago in India, if somebody talked about doing any job that's not a government job - he was considered a loser. A loser in a sense that he is doing a non-government job only because he couldn't secure it on merit. If you are my age(about 25-27), you will understand what I am talking about. If you are younger, talk to your parents. In today's India, nobody, almost nobody wants to do a government job. I don't need to elaborate on this as you all are aware of the reasons.

Stock market is another doomed territory. It was like this 10 years ago, and its like this even now. What will happen to you when you drive a car in a busy street if you can't drive? Boom, crash, thud!!! How did you learn cycling? You learnt it with the help of your elder brother, may be your good friend. Where did you go cycling before you hit the road? You might have tried lane less visited first, and then when you had sufficient courage/confidence then only you ventured the street. Great.

They say that Stock market is unpredictable. So is the street you drove on to reach your destination today. Do I sound convincing? Read on...

When you are in your car, you feel safe as you are actually safe and in control of things. You know the best route forward, and you know the complications of over speeding or rash driving. You know everything about driving on road. What you don't know is what is going to happen at the next turn. But that doesn't stop you from driving on road. You say that it still is the best and safest mode of communication.

Stock market is much like driving a car. In a car you know how to change gears, when to apply brakes. Here you need to know about it too. While driving a car, you need to see the street condition, here you need to see market condition. You need to be well informed on road about traffic jams after the next stop light, here you need to be well informed of any negative news/sentiment for any company. Simply avoid going there.

My dad told me - "its a gamble". He said - "my elder brother invested in some company about 10 years ago at a rate of Rs. 200 per share and the very next month it dropped down to Rs. 150 per share, and he had to incur losses eventually. He vowed never to invest in stocks again!!!"
I checked the current price of the stock, and it was trading at Rs. 1200 today!!! He then said - "do you also gamble?". I said - "No". But I then wanted to explain him about "investment" and "trading" - the Warren Buffet way. I don't know if he was convinced, but then I thought of writing this blog.

You need to clear off your misconception about stock market. Its neither a magic wand nor axing your foot. Its somewhere in the middle. Its more on you than on stocks. Its about how prepared you are to take on the road. It depends whether you are good driver or a crasher.

The world's richest man Warren Buffet started "investing" at the age of 11. The word "investing" is in double quotes because it has a special meaning. Investments are always long term. Its done only after a good research either by yourself or by your financial planner. By long term I mean at-least 3 to 5 years. You always see that the market is highly volatile and if you see the daily graph of a stock, its like a heart beat of a mouse - sometimes of a dieing mouse. Frequent ups and downs and going down eventually. But if you see an yearly graph you will see a trend. You will see that although the stock has performed badly sometimes but it is going up. So daily volatility doesn't affect you at all. In-fact you don't need to be affected by that.

You must have heard that many traders went bankrupt this 18th January - the famous stock bloodbath day. I would like to mention 2 things: they were not investors, they were traders - day traders doing intra-day trade where its mandatory to square off the position by end of the day. Secondly - they didn't adhere to the basic principles of investing.

I will continue this captivating discussion in my next post. But, I am sure I have given you certain pointers to think about. Did I say that contrary to popular belief in India, Equities/Stocks have been giving the highest return in the last 15 years, even more than real estate investments? Think about it, or should I say start researching :)