Being Emotional or Greedy can destroy you in Equity markets, be it Shares or Mutual Funds. Equity investments require a lot of emotional control and discipline.
What Are Equities?
Equities are stocks that are owned by people/institutions who have a right to vote at the company’s meetings and to receive part of the company’s profits. There are two ways of investing in Equities. Either you can buy the shares directly or you can buy Mutual Funds. Read the below article to get an idea about both by Dhirendra Kumar of Value Research.
Read More: https://economictimes.indiatimes.com/wealth/invest/investing-in-equity-mutual-funds-versus-investing-in-shares-which-is-better/articleshow/63949573.cms
In shares the gain or loss in a year could be many times. So may see a lakh becoming 10 lakhs or 10 thousand. Though practically nothing may be happening to a good company but it is the buy and sell decisions of people that cause this volatility(demand/supply-the more the demand the higher people will be willing to pay for a share and its price will go up and vice a versa). However, in a good Multi-Cap Mutual Fund all you can see is at a max of 2.5 times growth or a fall of 50%. ( this is from the data of the past 25 years ). But in shares, it could be far more on both sides. While nobody minds the upside, the downside can be emotionally traumatic.
But the greed of phenomenal upsurges in shares of some companies appears very appealing to a new investor compared to 15-20 returns of MF in long term. So many people take the path of investing in shares directly only to get out later with losses and thereafter remain in traditional forms of investment like FD’s/ PF etc. A lot of people want something that will multiply their wealth many folds in a short time or they settle for safe avenues like PF or FD’s.
There is no shortcut to wealth creation. It takes time. It may take a salaried class 10-20 years to create wealth that would make him financially independent. Trying to do it fast may make you otherwise. Warren Buffet became a billionaire at 60.
So the author says that for a beginner investing in equities through Mutual Funds is a better option. It is not that people have not had success in investing directly in shares. The people who have made it big are the ones who invested directly in stocks like Rakesh Jhunjhunwala, Warren Buffet. But they are professionals. All-day long what he did was this. Are you a professional investor?
In the long run the market always goes up but a lot of people still lose money because they buy at the totally wrong time and they sell at the totally wrong time. They tend to buy at high and sell at low because they get emotional. Emotion and greed are two things that will destroy you in Equities. You have to be logical and disciplined and not emotional
An average person has a daytime job. Can you allocate so much time every day to research which stocks to buy/sell? Many people quit shares with bitter experience to not even invest in MF subsequently. I have spoken to a lot of people who invest in shares directly. Most of them told me that they are just breaking even or are in some losses. There are some that have told me they have received decent returns from shares (I have met fewer of them). Professional investors use a lot of indicators to choose which shares to buy rather than just seeing the trend of price. A non-professional may not have that kind of knowledge and may simply do what others are doing. He may not have emotional control over his hard-earned money.
Now, how do the broking company make money? They get certain commissions every time you trade, i.e when you buy or sell. So they often tend to encourage a lot of transactions. For some broking companies, the relentlessly pursued goal is to make as many people trade as much as possible, without any regard to what kind of investment and what level of risk-taking is suitable for them. The net result is that an overwhelming proportion of small investors eventually make big losses — sometimes losing far more than they intended to even invest — while brokers and exchanges make more revenue from the greater amount of trading that they encourage.
Warren Buffet is considered to be one of the best investors in the world. Here is what Warren Buffet says about investing for a non-professional investor:-
Warren Buffet On Investing In Equities
If you invest in equities then you should do it because you believe in the companies and their business model. Not because of the change in the stock prices. Equity investment is not easy psychologically. If you cannot see volatility in your equity investments then equity investments are not for you. If you enter equity aiming to double your money in 6 months ,you are at the wrong place. You are gambling rather than investing. Some people are better off not investing in equities. If you bought a good business(stocks) then you really don’t need to bother about its stock price on a daily basis. Hold it in long term just like you buy and hold a piece of farmland or a house. Just think of this like this- if you buy a flat, it s price keeps changing during a course of year . But do you try to find out everyday- how much is it worth today and do you think of selling it if the price has dropped or increased in say a few months?. Similarly you should not be doing the same to your stocks and MFs if you choose them right.
