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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  1. I believe investing in stock markets is not rocket science. One just needs to form the right habits, and follow some simple rules like – buying a business and not a stock, giving more importance to the business value than the stock price, keeping a margin of safety, and shutting off all behavioral biases. Easier said than done, but practice can help a lot.

  2. We would take a different take on the statement that “the odds are terribly against (retail investors).”
    If a retail investor has decided to –
    1) Stay invested in equities for the long run, &
    2) Is ready to limit his purchases to good and sustainable businesses,

    then he is at an advantage. Unlike Fund managers and traders, a retail investor is not governed by redemption pressures or margin calls. Discipline and patience are two qualities which a retail investor, willing to earn high returns from equities, be ready to adopt.

  3. Unfortunately, many retail investors do not understand when to get in and get out of markets. Most people buy either because someone tells them, just a hunch or their agent (a person who sells them mutual fund and gives back 1-2% upfront) or simply cause market is going up. No logical thought process or analysis of underlying financial instrument. If by chance they make a good profit then they feel they know about markets and companies but if things go bad then they would hold on to the financial instrument in the hope that someday it will make a good profit….

    Any financial adviser always tells you where to invest but never tells when to invest in what and when to secure profits unless you have substantial investment capital…

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