@stockifi_Invest 02/05/2020

Why Is Investing Difficult?

1|P ag e
 @stockifi_Invest 02/05/2020

“Go to college, study hard, get good grades, land a dream job and voila! life is sorted!"

If you’re born in India there is a fair chance you would have come across this stunning piece
of advice. Throughout the generation, we have been taught very well on how to work hard
and earn money. But what about making our money work hard for ourselves?

Most of us are clueless when it comes to investing our money. Investing for the majority of
Indians means parking their money in gold, fixed deposits or real estate. They consider them
to be ‘’safe’’ investment options. But are they really safe?

As can be seen, the only asset class which has given inflation beating returns over a sustained
period of time is Equities. In 1979, Rs.1 lakh invested in gold would have become ~40 lakhs,
while the same invested in equities would have become a whopping Rs. 2.9 Crores. That is
the power of compounding.

However, the irony is that only about 2/3 percent of India’s household savings are exposed to
equity markets, compared to 18% in China and ~45% in US.

Majority of people justify their reluctance of investing in stock markets by numerous

audacious claims such as, ‘Stock market is a casino made only for gamblers’ or ‘Stock market
is risky’.

People who claim that ‘stock market is risky’, is like asking – Is fire dangerous? Yes, it is and
no, it isn’t. With fire, you can cook a man’s food and you can cook a man! It depends on how
you use it.

Warren Buffett once said – “Risk comes from not knowing what you’re doing.”

When it comes to investing, majority of people have barely any clue about what they are
doing. Investing is difficult because the world works on sentiment and understanding the
behaviour of the stock markets is difficult.
2|P ag e
 @stockifi_Invest 02/05/2020

The stock market is dominated by the crowd and the crowd works on sentiment, the crowd
behaviour dominates the decision making around the stock markets and this behaviour is the
main reason of the sudden changes which occur in the stock markets.

The emotional content of the people plays a big role in people losing track in the stock market
and losing their hard-earned money.

Herd Mentality
There is another big issue which revolves around the people’s mind which is the herd
mentality and because the herd mentality is always at work therefore people go with the
crowd, if the neighbours starts dumbing any stock in the stock market it is certain that the
whole lot of the crowd will also follow that and start dumbing the stocks even if the
fundamentals around the market is pretty strong.

That’s the reason why it is reported that 95% of the investors in the stock market lose their
money because they go with the herd mentality and the 2 out of the 20 people who are able
to control their emotions to not go on with this herd mentality will make a huge fortune as
they will be able to earn all the money which the other 18 have lost in the market.

Black Monday
Talking about such an instance look at what happened during the Black Monday in May 2004
when the market lost ~15% on a single trading day and the reason which was noted was that
the BJP was ruled out of power by the Congress.

Can anyone figure out whether this is a genuine reason for the stock market to fall this, was
the results so bad, or it was certain that there is no tomorrow, the only thing which led to this
fall was because the sentiment changed after the results the investors were expecting that
BJP will come to power again but it changed and it is the human tendency that they don’t like
changes, we don’t like changes.

Hence there was gloom all around the country which led to people dumping stocks like
anything, and because of the herd mentality and the people following each other, other
people around the country also started dumping the stocks and the stock market tumbled.

But if we talk about rationale investor and if someone had controlled their emotions that day
and instead of selling/dumping the stocks that day they started buying the stocks, it would
have made a fortune.

The success in the financial market revolves around understanding behavioural science, this
will help people control their emotions and at the same time understand other people’s
emotions and mistakes which can benefit the rationale investor.

3|P ag e
 @stockifi_Invest 02/05/2020

The 3 Ways of Investing

1. The Intellectually Difficult Path: Being “Patient”
This path is the one which is taken by the various investors, who have made a fortune and we
try being like them or dream to be like them in our investing life.

But this path which is named as the intellectually difficult path is very difficult as this path is
pursued by the ones who have a profound knowledge of investing in the stock markets, can
see the future trends of the company very clearly and can relate the business with the current
market environment about how these businesses are going to perform in this market
conditions.

Patience is the long-term game which needs to be played very well to generate great returns
or to beat the market. The likes of Warren Buffet also know that patience is a virtue and
therefore he takes long-term positions.

The difficult part in this overall path of intellectually is that here you have to have a good
knowledge of the different concepts in investing about how different business work, how will
the macroeconomic policies/themes will impact the business and the different market forces
which is impacting the industry and what are the trends which can be seen in the forces
(whether the suppliers bargaining power is increasing or the customers are controlling the
market).

The investors who plan on investing by knowing all these things generally go for long-term
positions as they are looking for good opportunities and a great bargain price to get into the
business.

4|P ag e
 @stockifi_Invest 02/05/2020

The short-term events don’t perturb them like different events, news, rumours and gossip
which can create a short-term volatility in the stock but won’t be lasting long.

The investors who believe that opportunities are always there, but you must take decisions
based on your knowledge about when is the right time to enter into the market.

The question of what the right moment for investing is very important, more than what is the
right price to invest.

Everyone in the investing world wants to be an investor of this kind but not many become as
they believe that we are not blessed as Warren Buffet or Peter Lynch are, which is a wrong
notion when seen in the long term because everybody has the same information about the
companies which are traded in the market (this is called efficient market hypothesis), but we
don’t seem to analyse all these information present in front of us to know about when is the
right time to invest, neither we look for opportunities.

It is their hard work which pays them by letting them know about the right opportunities and
the right time of investing and not just by mere rumours.

2. The Physically Difficult Path: Play smart, not hard

Playing smart is what all needed in the stock market, but many of the investors get deeply
involved physically to beat the market.

They are so much involved in gathering information from the markets that they forget to play
the smarter way to beat the market.

These types of people are continuously busy in making calls and receiving call from the traders
around the world to get the information and knowing about the trades which they have
placed and what is the returns they are able to generate.

People generally monitor the stock price movements right from the start of the day when the
stock market opens till the closing of the stock and even this is not enough for them they are
busy flipping the newspaper looking for news in their free time to get some information to
take a trade upon.

The decisions made by these investors are basically on the rumours because they get excited
about the market gossips which are prevailing in the market and floating in the market
through various streams like WhatsApp group, Telegram and various another platform.

5|P ag e
 @stockifi_Invest 02/05/2020

The people who are continuously spending their physically energy in collecting information
and getting to know about the rumours in the market think they are the only one who can
access this information, but this is not true everybody in the world has this information.

Focusing on the news looking for political developments, monsoon forecasts (to take seasonal
trades), inflation changes (figures), change in the portfolio of the hedge fund manager and
GDP growth doesn’t let you grab that opportunity of making profit because this things are
being looked upon by every investor in the world so looking at this figures is not a smart move.

The day traders also take physically difficult path of investing by gathering lots and lots of
information during the whole day to take trades and make profit. But is this path the correct
one because all the fund managers and the day traders around the globe will be treading the
same path and if everyone is on the same path mean that none of them will make profits,
because stock market is all about profiting when there is someone who will lose.

The quote which says “Life is simple, we make it complicated” is true everywhere both when
we talk about life and true when we talk about investing.

The volatility which occurs in the market occurs because there are a lot of investors who
follow the same route to invest and earn money by opting the physically difficult path of
collecting lots of information and making decisions based on the rumours, or going with the
trend by following the big investors.

Good opportunities will not come every time this should be believed, the good ones will come
once in a while and you have to be ready to spot them and spotting them doesn’t mean that
you keep collecting information and spend all your energy in this rather you will be able to
spot them when you are cool and have the time to think.

Digging hard won’t let you reach your destination of being a great investor being smart and
looking for the best opportunity is the only way to become a great investor.

3. Emotionally Difficult Path: The easy one

It is believed that the previous two ways which have been discussed is really intimidating, so
we the investor opt for the third one which is the emotionally difficult path.

This path is the easy one because here is nothing much to do, the only thing which must be
done is simply working out the long-term investment policy that is right for you as an investor
and stick to it.

So basically, here you will have to ignore some people or say many of them who are there to
continuously give you tips of investing about investing in this stock as this can give you a 10-
15% return in the next 1 month, which is when your friends and brokers tell you about their
great investment and also advice you the same of investing in the same stock, as this is a great
time to buy you have to ignore it and not buy the particular stock.

6|P ag e
 @stockifi_Invest 02/05/2020

The main thing which should be followed in this step of investing is sticking to your plan and
never believing in the herd mentality or following the rumours which are being floated around
the market.

When analysts on TV tell you that the market is going to crash and the stock prices are going
to tumble, don’t sell. When newspapers report a bear phase and tell you to hold more cash,
then invest in the stocks, don’t sell.

The emotional discipline is the big game player in the and controlling the same is the most
difficult but believing in yourself and the investment policy to which you are committed is
important for long-term success.

Patience focuses an investor’s attention on the goal of compounding money over a long
period. It can be magic even when the rate is modest. To give an example: If one were to
compound money at a modest rate of 7%, the money would double at the end of 10 years
and it would be 16 times at the end of 40 years.

Patience also helps you to control transaction costs. The more you churn your portfolio the
more you pay the broker in terms of brokerage and off course the government in terms of
taxes on your capital gains. Then you also have costs like depository charges, transaction tax
and service tax. All these costs could be avoided if one has patience.

We must learn to think with our emotions rather than have our emotions do the thinking.
Understanding our own anomalies as also that of others will help us become better investors
then being following the crowd or listening to the people around you.

7|P ag e