Equit(Wisted): Busting Myths & Setting The Records Straight

Discount brokers and micro-SIP based mutual funds have rendered even INR 500 investments viable thus opening opportunities to the small investors.

The term ‘share market’ kindles negation, pessimism, and downright rejection even in today’s developed world. Only 49% of Americans and 2% of Indians have invested in the stock markets, which are plagued by prejudice and myths. Unfortunately, most of these thoughts are baseless and far from reality. These unfounded beliefs only ameliorate the barriers of investing into the already sophisticated world of equity markets. So, we decided to bust some myths and lend some help to you:

Investing in stock market is akin to Gambling

There is no logical correlation that a rational investor can attach between these two ideas. It is erroneous to conceptualize these as one and same. Investment means ownership which ultimately creates the wealth and drives the economy. Shares are not trading vehicles, they represent legitimate ownership of companies, thus entitling the holder to a proportional claim on the under-holding investments’ assets as well as on the profits generated. This makes profiting from the stock markets directly proportional to the quality of the underlying assets under investment. There is little or no luck involved here. Contrarily, gambling simply involves the movement of money from winners to losers, without any gain being involved. It is a Zero-sum game. No value is ever created for the participant. This is in stark contrast to the stock market where competition amongst companies ultimately increases the productivity and encourages innovation, progress. The creation of wealth and entertainment intended games can never be same unless you are trading in the stock markets. So, next time somebody says that just tell them how wrong they are.?

Only the wealthy and brokers should invest in the stock markets

Investments can be confusing for an average person. However, investment in the stock market doesn’t require a person to hold a degree in finance or economics. It demands the person to possess the intention to invest and a small capital to start with (as little as Rs. 500). The rest can be done with help from a financial advisor or simply invested into an ETF which further saves advisory fee and commissions. Discount brokers and micro-SIP based mutual funds have rendered even INR 500 investments viable thus opening opportunities to the small investors. Markets have also become relatively safer and harder to manipulate by dealers due to resilient supervision by agencies like SEBI. So, stock markets are nor more the game of the rich and in fact, retail money is now ruling the market.

Stock that goes up always comes down and vice-versa

This is another interesting myth popularly attached to the stock market. It is important that we do not view investments from this point of view at all. This is explained by an example:

  1. Company A made profits last year but it has failed to do so this year & the share price has fallen from $50 to $10.
  2. Company B has seen its stock price go up from $10 to $20.

For a rational investor, this information isn’t simply enough to take a decision. However, for the extent to which we are irrational, most of the investors tend to prefer the first stock hoping that the stock will eventually make it back up to those level. This approach has no rational explanation. The rise and fall in stock are related to the performance of the companies, not to one’s hopes and beliefs. It is important to buy good companies at reasonable prices. Low-quality companies will remain depressed and those doing well remain higher, there is no force or tendency to necessarily take it the other way. Performance of the company is the ultimate driver of stock prices. (albeit in the long term)

Higher Risks = Higher Returns

No doubt, it sounds something logical but the investment in stock nowhere satisfies this criterion. What it requires is focus on value investing, that involves unearthing the discarded and undervalued stocks by market so that investors can get them at a lower price and they end up in earning a huge amount. It nowhere necessities the presence of risks.

Market forecasts are always correct

The markets are too volatile and encompass too many factors for a human to contemplate and predict far into the future. Anyone claiming that doesn’t deserve attention. Due to the law of big numbers, a few predictions may become true from the millions made daily. This does not warrant believing any such people. Consistency and authenticity are rare traits with market forecasters. From WhatsApp stock tips to the revered market gurus making predictions, anything can be false. This is also a reason many investors lose money in the market and return to put the blame on various things. It is thus better to be safe than sorry.

Investment in stock markets are complicated

People think that investment in stocks is complicated because they see the investors reading enigmatic charts, discussing perplexing theories and principles and speaking in a language which ordinary people cannot understand. The fact is that the investor need not learn all of that to start with. It just requires a basic understanding of financial statements, some basic business sense and some down to earth common sense.  There is no need to go through entire accounting principles and theories. No doubt investment requires some work but that is not too complicated.  Some people think that one needs to have insider information to profit from the stock market, which is just a myth. An investor requires only basic understanding, not any insider information to make profits. Losses are often caused due to uninformed investing, which is nowhere akin to complicated nature of the investment.

We will bust a few more myths in our next take. Just post your doubts in the comments section.

Savart is India’s largest Investment Advisor based on number of unique portfolios under advisory.