The Stock Market Syndrome – Your wealth is out there in abundance, grab it

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years”  - Warren Buffett

It’s Money, It’s for a better future, It’s scary and sometimes it’s gambling. Only a few even think of investing their money in stock market through Equity, Derivatives or Mutual / Insurance funds. Many treat this as untouchable. Stock markets of growing economy like India are a boon that many should latch on to. While it is imperative that you must be part of this, it’s important that you take caution before “blindly” investing and eventually losing your hard earned money. You need to get your basics right and ensure these are followed religiously before taking a plunge. Keeping your money in traditional savings account, post office savings, buying a house etc are not going to fetch you the kind of return that stock markets would deliver.

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” - Robert G. Allen

Easy Money

First and biggest mistake. Many think people involved in Equity or Derivatives market make easy money sitting in front of their computers or TV screens and just buy/sell stocks to make a fortune. Well, if that was the case wouldn’t 90% of this country’s population trade in stock market? Other factor is that people enter this market thinking its easy money, burn their fingers, empty their pockets and owe never to return to this “wretched” stock market again.

“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets” - Peter Lynch

Timing the Market

Many a time we tend to be smart or think so and try to time markets. In doing so, end up losing a lot. Some people think it’s smart, some think they got the analysis right. However, it’s not advisable to try and time Markets. It can completely take you by surprise. Even best of market gurus have been caught off guard. Instead of trying time the market, try spending time in market. No one has ever lost money staying longer in the market.

“Financial peace isn’t the acquisition of stuff. It’s learning to live on less than you make, so you can give money back and have money to invest. You can’t win until you do this.” - Dave Ramsey

Catching the falling knife

A big blunder. People see markets have corrected a few hundred points and try to make maximum of it by either shorting the market or trying to go long thinking it will reverse. A falling market is like a knife. Allow it to settle down; else in trying to catch the falling knife you will be left profusely bleeding with losses. Spend time analyzing reasons for fall and what experts have to say about the trend. Look at the charts and the patterns emerging from these charts. Allow market to settle down, this could be a few points up or down during the consolidation period. Don’t worry about missing out here; once it stabilizes you will get opportunities.

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” - Paul Samuelson

Averaging position

This could be a dangerous ploy. While we could have taken positions after due consideration, there is always a chance that some bad news either at domestic front or globally could alter market dynamics sharply. Sometime we tend to panic and in trying to recover lost money we start averaging our existing positions by pumping in more money. With more money into markets, chances are you will end up losing all of them. You should also be careful not to speculate. This can cause a lot of discomfort.

“The individual investor should act consistently as an investor and not as a speculator.” - Ben Graham

Maintain Stop loss

Don’t trade if you cannot follow this. Domestic investors some time tend to ignore falling stock prices and continue to hold stocks in a belief stocks will rally sooner than later. While we tend to quickly book profits, we seldom want to get out of markets by keeping stop loss strategy in place. We are hesitant to let go of some losses and leave it to fall further ensuring further losses. Anyone trading must learn this art of keeping stop losses.

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” - Warren Buffett

Don’t be impulsive

Staying calm in a volatile market is extremely crucial for your financial well being. A volatile market is a great opportunity to learn market strategy, chart pattern, technical swing. Instead we tend to get swayed away by the volatility where stocks move a few hundred points up and down in few session or days time. Such play is only for professional and stock players who recognize markets for decades and can hedge their position. Instead keep your money in the sidelines, assess market and take your chance when opportunity is right.

“One of the very nice things about investing in the stock market is that you learn about all different aspects of the economy. It’s your window into a very large world” - Ron Chernow

Don’t put all your eggs in one basket

While stock markets can give you great returns, it’s important that you don’t put all your money into this. Ensure you have a part of your funds diversified into other areas. This could be property, savings account for emergency, govt schemes such as post office, provident fund etc. Your financial planning needs to be thorough so that you don’t get caught up during personal crisis. Some part of your money should be available for you at any given time.

“Never invest emergency savings in the stock market” - Suze Orman

Borrowed money

Never invest borrowed money. If you don’t have enough money to invest then just don’t bother to invest in markets. No matter how compelling the situation is or how sure you are about certain stock market trend, it is never advisable to borrow money and invest. This could be in form of a loan, pledged amount of gold, vehicle, property or from friends, relatives. Bring in money only when it’s your own. Stock markets are always going to be around and will continue to give opportunities.

“I have a million dollars in the stock market, because if I lose a million dollars, I don’t personally care” - Suze Orman

Stick to blue chip stocks

While stock markets have hundreds of options to pick and chose. In a volatile market, it is always advisable to pick blue chips stocks. These are well established companies which have a solid balance sheet like the top IT, Banking or Pharma type of companies. These stock prices may also dip during a falling market or due to other factors such as weak earnings in a quarter, industry related bad news etc. However, remember these are quality companies which were built by some great leaders of our time. These are companies that have a solid foundation and will stand the test of time.

“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” - Robert Kiyosaki

Have a reliable financial consultant or broker

While you may still do things on your own, having a financial consultant or broker helps. They do this day in and day out. Don’t have the brokerage or fees play in your mind. Chances are you are not going to do this full time and hence its important you have someone who can keep you abreast with latest trends and details. There are many out in the market and do your research on these individuals, firms, stock brokers, banks and chose the one that fits your bill. Remember no matter what the research reports suggest, do take some time out to do your own check. You should know what you are doing.

“Know what you own, and know why you own it.” - Peter Lynch

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Quote for the day

"As a bull market continues, almost anything you buy goes up. It makes you feel that investing in stocks is a very easy and safe and that you're a financial genius." - Ron Chernow