Self-defeating behaviour of investors - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Self-defeating behaviour of investors

Apr 11, 2011

Everyone comes to the stock markets to earn 'higher' returns. Definitely higher than that from other investment sources like fixed deposits, bonds etc. Then the greed gets the better of them. Investors start thinking about beating the market and earning supernormal profits in a short time.

While worrying about the profits most investors start ignoring the other side of the coin. The consideration of loss. On the onset, let us clarify that here we are referring to the possible losses on stock investment and not the loss a company suffers time-to-time in the course of its business.

There is good reason why investors stop thinking about the loss. Many a time they see prices of some stocks multiplying several times within a short span. During periods of bull run , they perceive that stocks will move in only one direction i.e. up! In the words of all time great value investor Benjamin Graham "Back in the boom years of the late 1990s, when technology stocks seemed to be doubling in value every day, the notion that you could lose almost all your money seemed absurd." But in reality, by the end of 2002, many of the dot-com and telecom stocks had lost 95% of their value or more.

Now just do a small calculation. If you lose 95% of you money, how much return you need to generate to get back the lost money. It is a massive 1900%. Just to simplify the idea in terms of actual prices, if you have bought a share at Rs 100 and the price of the same goes down to Rs 5, the stock will have to go up 1900% before it touches Rs 100 again. Have you ever thought of making this kind of return? It means you will perhaps never be able to get back the lost money. Many investors suffered similar kind of losses in dot-com bust of 2002 or in 2008 market crash.

So it is very clear that we must take care of the downside first before we think of any return. We must minimize the odds of suffering irreversible losses. That's why great value investors like Benjamin Graham and Warren Buffet always emphasized on having a big margin of safety in the stock market investments. We must consider our risk reward ratio and try to keep it as low as possible. This ratio simply is the amount of risk undertaken to capture the returns to the expected returns from an investment.

To summarise, we believe that investments cannot be a one-sided thought process. While the gains are important, we must never forget about the risk we are taking. And that must be included in our analysis whenever we make any investment decision. Only then we can maximize the chances of achieving sustainable gains.

Equitymaster requests your view! Post a comment on "Self-defeating behaviour of investors". Click here!

1 Responses to "Self-defeating behaviour of investors"

Jose Paul Martin

Apr 11, 2011

There is another way, besides looking at the margin of safety. Many times investors/traders don't know when to exit. But with a Trailing Stop Strategy, they can protect themselves from the downside...

Equitymaster requests your view! Post a comment on "Self-defeating behaviour of investors". Click here!

More Views on News

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

ONGC to NMDC: Here are 5 Stocks Value Investors Should Closely Track (Views On News)

Nov 26, 2021

Before investing in value stocks, research the company and gain insight into why the market is discounting it.

Top 5 Stocks FIIs Bought and Sold Recently (Views On News)

Nov 25, 2021

FIIs have largely stayed on sidelines for the past few months, withdrawing money across emerging markets.

Everything to Know About the Upcoming Tega Industries IPO (Views On News)

Nov 27, 2021

Are you looking to apply for the Tega Industries IPO? You must ensure that you know specific details.

3 Charts on Why the Indian Bull Looks Tired podcast (Views On News)

Nov 27, 2021

Rahul Shah explains the key reasons behind his pessimistic outlook on the stock market.

More Views on News

Most Popular

Differences Between Trading and Investing

A simple to guide to understand the difference between investing and trading

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

How to Hit Rs 100 Crore Wealth in Your Lifetime (Equitymaster Wealth)

Nov 15, 2021

This is how you can achieve the ambitious goal of a net worth of Rs 100 crore.

Don't Sell these Stocks if the Market Falls (Profit Hunter)

Nov 17, 2021

These are the 3 types of stocks that you should not sell in a market crash.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Nov 26, 2021 (Close)