How overconfidence could hurt your money

While the number of investors surged dramatically to three times the level three years ago, the sharp fall in share prices has braked the euphoria.
Image used for representational purpose only. (File Photo)
Image used for representational purpose only. (File Photo)

There are myths about the world and then myths about us. While myths about the world would get tackled in due course, those about us would take shocks before they are busted. In the aftermath of the great stock market crash of May 2020, a lot of new people made an entry. After years of procrastination on whether to invest or not, many of you decided to take the plunge. The premise was that the right time to get into the stock market is when it is low. The idea was not wrong. However, there was barely any method to the madness. People went with the herd and bought shares. Some relied on friendly advice to do so. A significant number of them are young and first-time investors.

Bankers and stockbrokers were quick to entice them through structured digital media campaigns to get the investment journey started. Once you become a customer, you may not get research or individual attention. You are pretty much on your own.

The IPO boom last year saw high-profile companies going public. Many of the first-time investors applied for shares in those IPOs. Several did that, backed by IPO funding schemes put out by stockbrokers. While the number of investors surged dramatically to three times the level three years ago, the sharp fall in share prices has braked the euphoria.

The latest Demat account data shows a sharp fall in new Demat accounts opened in May and June 2022. The first such reversal of trend in a long time. The retail trading activity is declining for the first time after an 18-month surge. Many individuals have suffered a financial loss.

The monthly trading volume data shows a sharp slump in the number of shares traded. In June 2022, it was the lowest trading volume on the National Stock Exchange in terms of the number of shares traded. Nithin Kamath, founder, and CEO at Zerodha, a market leader in digital broking, lamented in a tweet recently that when people are sold a product under the influence of greed and think nothing can go wrong, they rarely invest small amounts and be conservative.

If you take a cue from that tweet, you may realise that the greed to make more money quickly is at it again. There is hardly anything like fast money. Strangely, people think that you can multiply your wealth in no time in equity markets. Warren Buffett, the legendary American investor, became a billionaire through investing. But he took years to reach that mark. Buffett dedicated his life to investing and figuring out ways to analyse businesses. He became a successful businessman by giving his shareholders returns that only a few companies can. Bill Gates, Elon Musk or any other company founder became wealthy by solving the world’s problems and creating an unmatched competency.

Yes, there is money to be made in the equity markets. However, it will take time. You must invest regularly and allow it to grow with the businesses. That can happen only when you take a calibrated approach to your finances. You work with a team that includes you, your family, and a professional advisor. While many online courses can teach you fundamental and technical analysis, a lot of learning must come from within. The onus is on you to take an interest in your finances and manage them.

This column has often suggested using the money you do not need now to allocate to equity assets. While you do that, diversifying your risk through a proper asset allocation plan is essential. For someone unfamiliar with stock markets and the world of personal finance, a simple term insurance plan and a regular allocation to an index fund or an exchange-traded fund could be a good starting point. You must begin as a passive investor before you turn active. Knowledge is your vehicle for that purpose.

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