The Number One Mistake Every Stock Market Investor Makes
Every investor in the Indian stock market fears the bears. The problem is, it is almost impossible to know when it is coming, how long it will last, which sectors and companies it will affect the most and how it will affect our stock market investment portfolio. And when the bears come and hit the investment portfolio, many investors exit from the Indian stock markets, vouching never to reinvest.
This is one of the most prominent mistake stock market investors make– due to fear, they're even ready to sell good stocks in losses. The complete opposite of the winning strategy – Buy low, sell high.
However, there is no reason to fear and be alarmed! In this story, I will not only tell you how to survive the bears but also create wealth from it!
Leverage On The Sale & Discounts In The Stock Market in India!
I visited a nearby mall last weekend and came across colossal discount signs everywhere. Flat 50% Off, Flat 70% Off and so on. No wonder the mall was over-crowded with shoppers eagerly jostling for space, trying to grab a piece of their favourite merchandise before stocks ran out.
What is the reason behind this massive surge in sales? DISCOUNT is the keyword here.
Now, what exactly does a discount mean? The discount means we are getting the same thing or stuff at a lower price. We all love discounts when it comes to clothes, electronics, vehicles or even our day-to-day groceries.
Unfortunately, the same principle is not applicable in the Indian stock market. When there is a correction or discounts during the bear markets, many investors isolate the Indian stock market.
A significant stock market fall is an excellent opportunity to buy quality stocks at bargain prices. Know more.
When you buy a good stock at a discount price, the probability of making profits are much higher. But unfortunately what happens, in reality, is just the opposite.
As I wrote earlier, the majority of stock market investors panic and sell their stocks even if it means selling for a loss. It is the fear of losing money which triggers such an irrational decision. It is a scientifically proven fact that due to fear, people do absurd and illogical things to avoid making losses.
Why Fear Is Not As Bad As You Think?
Let's now take a scientific look at fear. Fear is an emotion triggered by a region of the brain called the amygdala. Even as the reaction starts in mind, the human body tries to make adjustments resulting in fight or flight mode.
Majority of investors in the stock market in India, opt for flight mode and end up selling their investments to prevent further losses or move to safer alternatives such as FD’s which offer low returns. In this process, they end up losing on the gains of remaining invested when the market bounces back again.
Emotions and investing don’t go hand in hand. Fear is one of the greatest enemies of investors.
To better understand this, let me give you some real examples.
Example 1 – Stock Market Correction Due To India’s Lehman Moment – The NBFC Crisis of 2018
After the collapse of IL&FS in Sep 2018, banks became cautious about lending money to NBFCs resulting in a liquidity crunch across the market. The IL&FS crisis created panic among stock market investors and triggered a large scale dumping of NBFC stocks.
There was widespread fear that an 'IL&FS-like' situation was emerging across NBFCs. As a result Nifty corrected from 11,738 points in Aug 2018, falling to 10,030 levels in Oct 2018, which is a fall of 14-15% in just two months.
But what happened next in the Indian stock markets? By June 2019, Nifty not only recovered but touched a new high of 12,088.
Example 2 – Stock Market Correction Post Introduction of FPI Surcharge in Budget 2019
Introduction of an FPI surcharge in Budget 2019 and fears of further escalation in US-China war resulted in a massive correction in Indian stock markets with Nifty falling from 12,088 in June 2019 to 10,670 levels in Sept 2019.
But what happened next? With the rollback of FPI surcharge and de-escalation of USA-China trade war crisis, stock markets in India bounced back quickly with Nifty touching new highs of 12,333 on 14th Jan 2020.
There are many similar examples such as the Global Financial Crisis of 2008, when Nifty corrected from 6,278 levels in Jan 2008 to 2,524 levels in Oct 2008. However, active economic measures undertaken by the government helped stock markets recover, and Nifty touched a new high of 6,312 by Nov 2010.
Let's take a consolidated look of Nifty for the last 20 years.
By looking at the above data is quite evident that fear is a useless emotion in the stock market in India, as investors who feared and exited their stock market investments lost out on significant gains when the tide turned.
The End Note - Forget Fear, Look at the Big Picture
Fear is often the outcome of our past experiences or experiences of others we come across. But in stock market investments, one need not fear if invested in quality stocks. So rather than looking at bear markets with fear, consider it as an opportunity to invest more. For expert advice on stock market investing click here.
To conclude always remember, real fortunes in the stock market are made during times of economic distress or market corrections.
A perfect quote to summarize this by legendary investor Warren Buffet is - "If I see a sale in my favourite store, I go and buy some more of the stuff I like."
So next time you come across a stock market correction, rejoice and take your money bags out to go shopping in the Indian stock market.