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Equity investments are generally considered to be tricky and treated as a gamble by many. But, if one were to weed out this common misconception, stocks would lead to a consistent high performing asset class over a long to very longer periods of time.
Equity investments are generally considered to be tricky and treated as a gamble by many. But, if one were to weed out this common misconception, stocks would lead to a consistent high performing asset class over a long to very longer periods of time.
The most common reason why one ends up with a negative perception on stocks is the way they treat and approach this investment. It’s always viewed and understood as lucky when someone makes profits in stock markets while any other result is a mere confirmation of their long standing perceptions.
For instance, the domestic market indices have constantly risen since inception but have the investors’ wealth? The answer is both yes and no. This is because most stock investments involve discipline to the core and persistence with a rationale. This is in a short quantum with the investor community. Investors always make decisions to earn better returns and most often neglect the inherent risks in an investment. They almost always overestimate their risk appetite and underestimate the recovery from a risk while making these decisions.
So, they pull out of an investment when they ideally should be holding and enter when they otherwise should avoid. This herd mentality influences most of the decision making and thus the results. One needs to recognize some of the important factors while investing in stock markets. Like Peter Lynch said, behind every stock is a company. Find out what it’s doing. So, one has to study the company or the business the company operates in before investing in that stock. The common practice however is when there is a lot of buzz around a particular stock one gets invested in. If this stock experiences any volatility they back out, solely as they can’t comprehend the business cycles or environment that company operates in.
Cash combined with courage in a time of crisis is priceless, said the Omaha of investment, Warren Buffet. This is important because if one understands the business risks a company is going through, then one could judiciously stay invested or top-up more depending upon the event. Also, this brings in the restraint and control during the periods of volatility.
The other prominent mistake most investors indulge in is the timelines they get fixated while investing in stocks. One has to understand that the success in stock markets is more about time spent in the market rather than timing the market. This brings in forefront about the approach one should adhere towards stock investments. Also, this throws up the question of valuations of the companies. If one is not sure of the current valuation of a stock i.e. whether it’s at a premium or at a discount, it’s very difficult to add or reduce the exposure to that particular stock.
For serious investors, it’s the combination of derived knowledge i.e. through reading, secondary research, publications, etc and acquired knowledge i.e. through primary research and understanding about the business and companies. The latter is a very difficult process as it involves not just time but also to grasp not just a company’s business but also of their peers and competitors. The other way is to get the invested through equity mutual funds where each of them offer diversification in terms of risk, stocks and businesses. This comes with an expertise backing in terms of research and decision making thus simplifying the entire process whilst enjoying the returns.
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