Top eight myths about investing in stock markets and how to overcome them

For a long time, the stock markets were considered to be a club for the wealthy and the enterprising. That emanated from the old wisdom that gentlemen preferred bonds. There are a lot more flexible and even small retail investors feel a lot more comfortable. Understanding how to invest in share markets is all about dispelling popular myths about share markets. Myths are, typically, based on half-baked knowledge and incorrect understanding of the nuances of the share market. Here are eight such myths which you need to dispel before investing in equities.

1. I am not filthy rich, so stock markets are not for me

Firstly, you do not have to be filthy rich to invest in stock markets. That is a big myth. For example, you can buy just 1 share of SBI which will cost you just about Rs.250. That is all you need to invest in the stock markets. You surely don’t have to be a millionaire to buy stocks in the Indian markets. Remember, to create wealth in the stock markets you don’t have to make mega investments. You just need to start early and then keep investing consistently over a period of time.

2. I am not the Gordon Gecko types nor the Warren Buffett types

That is what happens when we watch too many Hollywood movies that portray investors and traders as larger than life personalities. You don’t have to be a star trader or a market expert to participate in the equity markets. In fact, if you don’t know much about the markets and you are humble enough to acknowledge that then you are on track to becoming a successful investor in your life. Go ahead; you don’t need to be a superstar to invest in equities.

3. At 40, I am just too old to learn new tricks

How to invest in share markets at the age of 40+ is a normal question. Remember, the biggest risk that you are exposed to is not taking any risk in the market. If you turn conservative and put all your money in money market funds you will never generate wealth. At 40 you still have 20 years of earning life ahead of you. As you grow older you can reduce your exposure to equities but you do not need to avoid equities altogether. On the other hand, if you manage to reduce your liabilities then your risk capacity dictates that you take on more of equities.

4. I will buy this company because it was my dad’s favourite too

If you look at the Sensex composition 25 years back and compare it with the Sensex today then there is a vast difference. Stocks like Century and Arvind were blue chips at that time. Stocks like Infosys, TCS and HDFC Bank were either unheard of or did not exist at that point of time. There are great companies like Reliance and Hindustan Unilever which did not give not give any returns for long periods of 10-12 years. When a company becomes very large, it is normally difficult to give aggressive returns. Look at Infosys. It gave fantastic returns between 1995 and 2010. In the last few years, it has struggled, although it is still a great company. Don’t fall in love with a company just because your dad owned it. IBM has gone nowhere in the last 25 years and stocks like Apple and Amazon became $1 trillion companies in the same period.

5. So, more risk means more returns, that is great

Get the causal relationship right! Higher returns entail higher risk but that does not mean that higher risk will lead to higher returns. Let us take an example. If you take a high risk and buy low quality penny stocks that that may not lead to higher returns. On the contrary, you may end up losing up all your capital. Investing in share markets is all about measuring your risk and setting your risk-return trade-off. Don’t think that just because you take on higher risk, you are entitled to higher returns. It does not work that way.

6. FIIs are piling on to this stock, so I will buy it too

You must not do that just because you do not have the same risk capacity that a foreign institutional investor has. Additionally, FIIs may be buying for different reasons. They may be buying just to diversify their portfolio. FIIs may also be buying in one account and selling in another account. Quite often FIIs create arbitrage positions i.e. long on equity and short on futures. Buying such stocks without looking at the nature of the transaction will lead you nowhere.

7. I want to invest in shares but I am scared because it is like a casino

Investing in share markets is different from speculating in stock markets. In the short run the stock markets may be a slotting machine but in the lot run it is a weighing machine. When we talk about investing, we are talking about the long run. If you are able to identify good stocks and hold on to such stocks for the long run then it will create wealth for you. Stocks will be like a casino only if you try to play the high-risk game like volatile stocks, penny stocks, leveraged trading etc.

8. I am accumulating the stock on every dip

Buying good stocks on dips is a good idea but buying bad stocks on dips is a very bad idea. Whenever you get this kind of bad idea think about stocks like Kingfisher, Deccan Chronicle, Satyam and many others which vanished without a trace. There is a difference between a quality stock correcting, a cyclical stock correcting and a worthless stock crumbling. How to invest in share markets is all about knowing this critical difference. You must accumulate cyclical stocks only when the cycle is showing prospects of a bounce. High quality stocks can be added on dips, but volatile and speculative stocks are a strict no.

Disclaimer: The above opinion is that of Vaibhav Agrawal (VP – Head of Research & ARQ at Angel Broking Ltd). Views expressed are his own.