Trying to beat the market? It's a waste... - Views on News from Equitymaster

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Trying to beat the market? It's a waste...

Sep 30, 2009

…of your effort and money, especially if you a young and first time investor.

The world of finance and the stock market have long had a huge fascination for many people. More so for the younger ones, who are newly venturing into the field for the first time and are bedazzled by success stories of people who have made truckloads of money in the stock market. Their ambition knows no bounds, and nor does their enthusiasm. But as many gurus have often expressed, when natural human instincts and the stockmarket come together, it can be quite a lethal combination. No one knew that better than Benjamin Graham, a prodigy in the field of the behavioral aspects of people in the market.

Graham lost his father at a young age, and subsequently his family slid into poverty. His mother, in an attempt to make things better, borrowed money to trade stocks on margin, but was tragically wiped out in the crash of 1907 where from its high the Dow-Jones Industrial Average saw a decline of about 50% within the span of a year.

Getting back to the many bright young people who enter the markets with big hopes and dreams, they enter with the expectation seeing their money grow quickly, and want to invest as smartly and aggressively as they can to achieve that goal.

This attitude is a great one to have, and can usually lead to a good amount of success in other fields where the enthusiasm and energy to keep doing something are much desired traits. But not in the stock markets! That is because continuous activity of buying and selling does not necessarily lead to continuous profits, as is often thought.

So what’s Graham’s advice? If you would like to practice active investing and make your own decisions, you are bound make some mistakes and consequently take some losses. But there is a bright side to that – you need not only bear these disappointments, but can actually profit from them in a big way by learning from mistakes and analysing where you went wrong.

Therefore Graham urges beginners in the stock market to not waste their effort and money in trying desperately to beat the market. They should instead focus on studying stock valuation, and initially test out their judgment on the price of a stock versus the value it offers with the smallest possible sums.

Indeed, an early experience in investing on your own is like gaining an education in a good university. However, whether the fees you pay for it is exorbitant or decent depends on the amount of money you are willing to put at risk in those initial times of learning. It follows that once you get that much needed experience and a sensible framework that you are confident about, the possibilities of profit are limitless over the long run.

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1 Responses to "Trying to beat the market? It's a waste..."

chittaranjan kundu

Oct 3, 2009

Very nice and practical advice.

Equitymaster requests your view! Post a comment on "Trying to beat the market? It's a waste...". Click here!

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