If there is one reason why retail investors will not make money in stock market.....
It is this...
They are highly risk averse.
I get a chance to discuss with many friends who are interested in investing in Stock Market. Most of them fall into the group of 'Fundamental Analysts'. They know that the Stock Price is dependent on the prospects of the company. To understand the prospects of the company they do 'Company Analysis' trying to find the growth rates and prospects of the company. They know that company will perform well if the industry perform well. So they do Industry Analysis and Macro Economic Analysis.
They do sector analysis, they evaluate the management of the company and they check out the P/E ratio of the company to assure themselves that they are not overpaying for these companies.
After doing all this analysis, they identify one or two companies that they think will do better than the market in future. Their analysis tells them that these companies are potential multi-baggers. Their current price is low, thereby offering them a very good margin of safety.
They are sure that this company will do well in future. At least 3X in two years, they assure you.
This is where things become interesting.
"Suppose you have 10 Core (100 Million) to Invest in Equities. Will you invest all of that money in these companies?", I ask them.
That is where you see a hesitation. A lack of confidence in their own views and analysis.
Most of them will tell that while they are very certain that the companies identified by them are bound to do well and give the kind of returns that they predict, they will not invest all their surplus income in one stock.
"It is better to do proper asset allocation", they will tell you sagely.
"But you know that the fundamentals of the company is excellent and you are sure that you will get 3X return. Then why not invest your income in this company?", I ask.
"What if I am wrong?", they respond.
There, right there my friends, is the reason why many of our friends do not become rich. They lack the courage of their convictions. They go and buy the best company and and also other not so good ones. They are like those people, who despite knowing that they are the best prepared, will ask their friends to make that management presentation. This reduces their potential to generate wealth on a significant level.
After 2 years, as predicted, the company would have given 3X returns. They will go around proudly pointing out that two years ago they had predicted this to happen.
I am not averse to this bad habit. About 4 months ago, when the price of TISCO was trading at about 200 with a PE of about 4, I had recommended TISCO to all and sundry. "This is a great company", I told anyone who cared to listen, "a PE of 4 provides significant margin of safety, this is a big company with operations across the world, the economy is picking up and the price is sure to double in a year. Moreover, this is a TATA group company and this group is famous for its Stakeholder Relationship."
Since I was sure that this is a great buy, I should have sold off all my shares and purchased TISCO. Did I do that? No. I went for Asset Allocation.
Today TISCO is trading at almost 600, which means 3X returns in just about 6 months.
Do I have Knowledge? Yes. Do I have trust in my Knowledge? No.
Do I have the potential to build wealth? Well....