Why not to buy stocks?

We’ve all seen posts on social media saying “If you would’ve bought this stock 20 years ago you would have a gazillion dollars now”. But most of us either didn’t or couldn’t. And these are now feel-good posts so people are attracted to the idea of 100x-ing their money and are sucked into buying courses offered by these people/companies.

The fact of the matter is, most people don’t need any courses to be able to multiply their money using investing. Because analysing a company doesn’t require more than a little mathematics. You can start by reading books related to the field (I’ll list some at the bottom). Having said that there are a few pitfalls for people like you and me, the “retail” crowd when investing.

First, the 100x trap. The markets and its participants were different 20 years ago. There was a lot more possibility of inefficiency because the information had to be actively found out, not available at a click. Now, this is a relatively smaller problem because the nature of companies and humans doesn’t change. Some companies will do good business and most people would not have the patience to hold through the market turbulence. So there lies your edge.

Second, information gap. We as retail traders/investors generally can’t get all the relevant information about the companies we like, while people with billions of dollars in assets, like banks, hedge funds and other financial institutions can directly call up the CEO of your favourite tech company and ask whatever is it that could bother them.

Third, management issues. It should be easy to invest since we only have to analyse numbers, no complex calculations necessary. But because a company’s performance is tied to the competency of its management, there will always be an unknown. And there is no metric to look at to check people. A CFO with a sterling reputation could suddenly be outed for cooking the books.

Fourth, reality. Stocks rarely accurately reflect the financial situation of the company. The market reflects what the participants (you, me, banks, other institutions) feel about the future of the company and the stock. I might think that the stock of Company A is to be sold, while you think it is to be bought. Just to give an example, Microsoft is an excellent company. But people who bought in the year 2000 had to wait 15 or so years to get to breakeven. Someone did want to buy it in 2000, they just had horribly bad timing.

Fifth, emotions. Even if you cross all the barriers listed above (you have information about an industry, you are a good judge of character and you are a good timer of the market) there is still the factor of emotions, because we are dealing with money. We don’t like to lose it. And stocks don’t double or triple overnight. They might take years to do so, and you might have to go through a good amount of volatility during this time.

That’s it for this article. Subscribe for free to receive new posts and support my work. And do let me know if you want a specific topic covered!

P.S. I’ll go into how to counter these problems in a later article. Meanwhile, you can go through these books:

1. Up on Wall Street by Peter Lynch: Mr Lynch is one of the most revered fund managers in history. Learn how he thinks about investing from this book.

2. Reminiscences of a Stock Operator by Edwin Lefèvre: This book is based on the story of legendary trader Jesse Livermore. Learn how professionals handle emotions in the market.

3. The Intelligent Investor by Benjamin Graham: This is a book on value investing which Mr Warren Buffet considers as his ideology.

P.S. You can read all my articles here.