Stock market: Where successful lot learns from other’s mistakes

There is no denying the fact that stock market is ‘the place’ where people make fortunes but it also ‘the place’ where fortunes are lost. There are statistics that state that less than five per cent of the investors who end up making money. But most investors lose their money because of small mistakes which can easily be overcome. Those who win are the ones who have learnt from their mistakes. It is said that one learns by making mistakes. But one can progress faster by learning from others mistakes. One of the most common mistakes that a retail investor makes is that they give away the decision making of initiating a trade to someone else. In this way, they forego the right to ‘own’ the trade. The psychological advantage for doing so is to pass on the blame to someone else if the trade does not work out. But in doing so, they have lost their hard earned money. Every successful investor on the contrary takes complete responsibility of his trades. Buying and selling are completely at his discretion and he does not give anyone else the right to take decisions on his behalf. Most unsuccessful investors get into a trade because it is in the news or it is moving higher or lower. They have little idea of the risk they are taking and the reward to expect whereas successful investors have a very good idea of the risk and reward to expect. They know their exit points even before initiating the trade. After all it is the exits that matter most. Profit on a trade till it is booked is only a notional profit. Unsuccessful investors have a phobia for taking losses it is as though accepting publically that they are wrong. They would rather wait for years to sell at their entry price rather than exit with a small loss and move on to catch the next opportunity. The market is never short of opportunities. Only thing one should be aware that one should be able to capitalise on other’s error. On the other end of the spectrum are traders who are too cautious and are either scared to press the trigger or want all the ducks to line up perfectly before taking the plunge. Procrastination is never good in normal life but it can be extremely costly in investing, both for buying as well as closing a trade. Investing is the art of dealing with uncertainties. How successfully you can deal with uncertainties will decide how successful you are going to be as an investor or trader. Perhaps the least understood but a very important feature of trading and investing is money management. How much to risk on each trade and what to expect from such risks is perhaps the single most important factor for longevity in the markets. Markets can remain irrational longer than you can remain solvent. Many investors take a huge position in a stock which is supposed to be a ‘sure-shot’ bet, because the last bet worked out well. Call it Murphy’s law, but the biggest losses always occur on your largest position. The biggest loss an unsuccessful investor makes is on a leveraged position. They have no idea of the risk they are being exposed to by taking leverage. Most of the stock market bottoms are made when the broker has to forcefully sell an investors’ leveraged position as the investor is unable to pay the margin call. Diversification is an important feature that few investors understand. They either buy stocks in the same sectors or in stocks that generally move together. Keeping one’s portfolio diversified is very important. An investor cannot keep all his eggs in one basket. Diversification into various sectors and various instruments is very important for every investor no matter how small or big. The amount of information floating around us these days tends to divert an investors’ attention. Successful investors, especially the fundamental types do their own research rather than relying on secondary information. The technical trader on the other hand believes that all news is in the price and remains unperturbed by the news flow. An unsuccessful investor changes his decision based on every news article and what anyone has said. The first thing that a trader or investor needs to learn is how to save his capital, that is sacrosanct. The moment he learns how to save his capital then learning how to build it is an easier job.