Investing in stock markets is all about emotion. There is a famous saying in stock market parlance “Buy on the rumor sell on the news” .Over the years a number of myths have been associated with stock market movements. So what is a myth? This is a widely believed but false idea. Investing in the stock markets based on myths can have devastating consequences. This is akin to crossing the road blindfolded. Remember in the absence of facts myths rush in.
Gambling is all about pure luck or chance. There is no logic and no strategy in gambling. Gambling is plain dumb luck.
Investing is totally different from gambling. The difference is akin to chalk and cheese. When one makes a decision to invest in the stock market he studies the economy thoroughly as well as the sector he intends to invest. One makes a thorough study of the Company he intends to invest, checks its financial health as well as the corporate governance of its management Remember a sound, strong management makes a great Company.
One has heard the famous saying “Fools rush where angels fear to tread”. So what does this saying mean? If one has been studying and tracking the market for a long time one is confident that he can handle anything. This is akin to a person who knows a little swimming trying to swim across the sea. One needs to acknowledge that the stock markets are vast and no one can claim to predict their movements with any degree of accuracy. Remember if one does not have the time or feels he is not good enough to manage his investments taking the help of a financial planner is a must.
When one visits a shoe shop what is the common sign he sees? Sale on..50% off. When one sees a discount or thinks he is getting top draw at bargain rates he rushes in. “Remember a bargain is something you don’t need at a price you cannot resist”.
One of the common practices followed in the stock market is making the 52 week high-low the be all and end all of investing. When a stock is at its 52 week low it seems an irresistible bargain. One immediately picks it up not caring to see why the price has crashed .A stock could be lowly priced due to an issue with its fundamentals. If a bank has a large number of nonperforming assets its problems are reflected in the stock price. Even though the banking stock might be available for a cheap price close to its 52 week low it might not be a good buy .One’s wealth would soon erode if he continues this style of investment.
One should not confuse bargain hunting with value investing. Bargain hunting is picking up a stock which is close to its 52 week low. Value investing is different. One checks a Companies price to book value ratio. One knows that book value is basically a Company’s net worth the difference between its assets and liabilities which gives its true worth. If one sees a high price to book value ratio it means that the Company is perceived to be fast growing or one finds it overvalued. If the price to book value is low it means one finds the Company undervalued or it has fundamental issues which in a bank might be high nonperforming assets.
One has a choice of favorite stocks when he invests in the markets. One spends hours and days tracking them hoping that in the next stock market crash or recession these pricey stocks will be his. Remember stock markets do not follow the laws of physics. What goes up must come down. Many blue chip stocks are known to weather a recession and some even thrive in such conditions.
If one waits for a correction in the market so that the stock price of these blue chip Companies would fall one misses the opportunity to pick it up at the current price and it might be many years when the stock corrects to the current price. Conversely the stock price might run away so quickly that one is filled with regret at the lost opportunity. Some stocks rise as much as 30% in a few weeks or months and one is left to rue the lost opportunity.
When one looks at the market he sees shares of different prices some as less as a couple of rupees called penny stocks and also pricey shares where a single piece costs a couple of thousands. What is the thought that flashes through one’s mind? Oh the penny stock costs just INR 2 rupees .It can double in no time. One has a share which costs INR 2000.No idea when this share will double in price. Better to bet on the penny stock would be the way to go.
One needs to note market capitalization which is the market price of the share multiplied by the number of outstanding shares which is basically shares picked up or purchased by investors. In order for a stock price to double its market capitalization needs to double assuming there is no change in the number of outstanding shares. One needs to remember that investors need to value a Company at twice its present worth in order for its share value to double. This does not depend on whether the price of a share is INR 2 or INR 2000.Practicality states that the chances of a fundamentally strong blue chip Company doubling in market capitalization is more likely to take place than a penny stock with no sound fundamentals.
There is a famous saying “The four most dangerous words in investing are “this time it’s different”. Those who don’t learn from their mistakes are condemned to repeat them. Remember fools learn from their own mistakes whereas the wise learn from other peoples mistakes.