It is not that the retail investor cannot invest on his own, it is just I think the odds are terribly against them. Let us look at some of the foolish statements that I hear from time to time:
1. I do not make losses in the market: A wife told me that this is exactly what her husband tells her!
What it means:
It just meant he did not know how to cut losses in the market – he just held on to shares which went below his cost! This is one of the worst things to do and will dramatically reduce your total returns. Admitting your mistakes is a very very important step necessary in any market – or in life itself!
2. I just BUY and HOLD for long periods of time – I am a long term player and hold on to shares for 3-5 years till it does well!
What it means: I just buy some shares and hold it for a long time. This is again a completely un focused and non strategic method of ‘hope’ based investing. Shares are chosen based on some irrational logic – it made money for my dad, I think there is a great demand for infrastructure, etc. – does not work!
3. I have a diversified portfolio :
What it means: I have bought a bunch of shares – there may or may not be any co-relation between them, and the list is some 40 companies. However 5 companies add upto 80% of the value! Makes no sense, this may not be diversified at all.
4. I use Price-Earning Ratio to buy shares: I buy shares of companies whose Price-Earning Ratios are low and sell those that are higher
What it means: . However after I bought some shares at a low P/E their P/E has gone lower! Using P/E ratio is not easy – calculating P/E is easy, but not interpreting the P/E. God bless the investor!
5. I have a good Adviser who tells me what to do!
What it means: I ask my broker who tells me what to buy and what to sell. His advise has not been bad, I have made a lot of profit and some losses. Overall it is in the positive category, so I am not worried.
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