For a select few, however, the greed is more powerful than their fear. They therefore, dare to take a plunge in the stock markets, though not with very encouraging results.
Fear and greed can often cloud our judgment and reasoning. As it is, investing demands one to be rational, disciplined and patient. Therefore, when we act due to our emotions, we only increase the probability of taking wrong decisions.
Let's see how one can overcome these fears to profit from the stock markets.
The fear of loss
Because one can lose money in the stock markets, most people don’t invest in shares. But the questions we need to ask are:
Is investing in stock market same as gambling?
Does making money depend on one's 'luck'?
What is the probability of making a loss?
Let's think rationally.
What does buying a share mean? It means being part of a business and sharing its profits and losses. If businesses make profit, the share prices will rise; if not, the prices will fall.
Now, does a business run on luck?
No! It runs on hard work. It runs on efficient management. Therefore, more often than not, a well-managed business will make money and consequently the share price will rise. Hence, if you invest in say 10-15 good businesses, majority of them will make profits and hence your probability of making money from such a portfolio will be much higher.
Hence, stock markets are not a casino. Luck has a very little role to play. A portfolio of good companies will give good returns with high probability.
One more important point. Can a business double its' profits in a few days? No. Businesses take time to grow. Therefore, keep your return expectations in line with the business growth. If businesses are growing at 15-20 per cent p.a. today, don’t expect to double you money in six months or one year.
Be patient. Give time for the businesses to grow. Also, look at making money from the portfolio as a whole, and not from each and every share.
The fear of being left out
Besides people who fear loss and keep away from stock markets, there are those who sit on the fence. They are ready to jump in when the markets show a consistently rising trend, so that they don’t miss the opportunity.
Just because everyone seems to be making money, they too join the party. They get in at high prices and without proper thought and study. This paradoxically increases the very probability of loss they were hoping to avoid by sitting on the fence.
The fear of losing the profit
Assuming you have overcome your fear of loss and invested in the markets. You have invested very rationally and thoughtfully in some good companies. These companies have done well and your share prices have appreciated. Does it mean that the job is done? No!
Most people fear that the markets might fall and they will lose all the profits that they have made. Therefore, they tend to get out too soon. As such they lose out on the opportunity to make big money. They have to be content with small profits.
Yes, it is important to book profits. But to book profits just because a share has been appreciated by a certain percent is not usually the right way to decide.
The better way is to check whether at current prices the stock is still undervalued or at least fairly valued. If yes, then one should hold on. Only when the price become overvalued, should one sell it.
The author, Sanjay Matai, is an investment advisor and promoter of wealtharchitects.in. He can be reached at sanjay.matai@moneycontrol.com.
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