The 90% Trap

Markets Crashed! Market’s crashing again! Oh my god! I have lost all the savings of my lifetime! I’m bamboozled, man! This whole market is a scam! It’s pure gambling! I will exit from all my positions! and will never ever think about risking my money here again!.” 

After fantasizing about how a person will double their money in the stock markets, how he or she will be driving a new ‘Mercedes-Benz’, or how he or she will have the most beautiful roadside bungalow in the most lavish area of the town, this is exactly how every ninth out of tenth investor feels before finally leaving the stock market.  

Introduction  

Since its foundation in 1875, the Bombay Stock Exchange of  Dalal Street has produced a world where diverse individuals have had diverse experiences. For some it has turned out to be instrumental in bringing their lives from rags to riches. However, for most it’s like a never-ending horrifying dream, that has no fruitful end. Over the years, we’ve witnessed Sensex and Nifty, breaking records again and again, touching new heights with each passing year and decade. This here is a glimpse of Sensex from Jan 1986 to the present 2023, showcasing what every fresher sees before entering into the market, phenomenal growth !!, where an investment of one lakh would have fetched today a whopping more than 1 crore!, More than a hundred times the investment made!

So, how is it that even after such resounding growth and such clear and transparent results, which are in front of us, only one out of every tenth investor is able to enjoy the fruits of these gains? How is it so that even with such high aspirations, such big dreams, with which a person who enters into the market, when he leaves it, the only thing he’s left with is just ‘Pure Regret’ as to why he even thought of entering into this arena, which was not suited for him. Before we answer all these questions, and dig deep into a person’s psychology investing in the markets, let’s have a basic understanding of how markets actually work.

How do markets function? 

So before the general market forces of demand and supply guide the prices of a stock, a company has to issue its shares in the market, for the first time in the form of an ‘Initial Public Offer’ or ‘IPO’. This money is used by the company for its own growth and expansion prospects. After that it’s mere buying and selling among various investors spread all around the world, and their buying and selling activities determine the price for a stock.

After the launch of the IPO, the company has no role in the price of the stock. When the number of buyers of a stock at a particular point of time rises than the number of sellers, its relative demand rises, and the price of the stock increases. Similarly when the number of sellers is relatively higher, the stock price plunges. Generally it’s seen that whenever the company is in the news for good reasons, or the company has announced remarkable quarterly or yearly results, the stock becomes more attractive to the investors, and the number of buyers willing to buy the stock increases and in turn raises the price of the stock. Now, on paper all this seems like a piece of cake. Okay, the company’s good, it’s having good growth, it has posted good results, it’s stock price is rising, let me buy this stock and make some bucks, it’s as simple as that. But how come even after knowing all this, a layman investor ends up losing money in the market? What psychology does he or she posses that even though not wanting to, he or she ends up seeing himself in the “90% trap”

The Trap 

Now to totally understand how a person falls into this ‘Trap’, we will approach a person’s psychology in 3 different stages. All of them interlink with one another to prepare the perfect pit for an investor to fall deep. So the first phase or the first section where an investor commits the mistake is the approach and the ‘unrealistic expectations’ with which he or she enters into the market. Every person enters into the stock market with an expectation of earning superior returns. However, believing that the markets will make you a millionaire in a couple of years after investing 5000Rs. is just like ‘Building a Castle in Air’.

For fulfilling those unrealistic expectations the second sin an investor commits is ‘trading with emotions’ in the stock market. A person can read as many books on the stock markets as he or she can, can research as much about the company in which he or she’s about to invest, can know perfectly by looking into the chart patterns of the company, the perfect timing to buy the stock, but the one aspect that he or she might not be able to control is his or her ‘’emotions in the market’. A person may be an ‘Aryabhatta’ in analysing stocks but he or she can’t survive in the markets if he or she doesn’t have control over his or her emotions. Fear,Greed, Hope & Regret are the pillars that act as an investor’s biggest enemy in the market.Fear can cause traders to panic and make rash decisions, while greed can lead them to take on excessive risk and chase after unrealistic gains. Hope can make traders hold onto losing positions for too long, while regret can cause them to second-guess their decisions and miss out on profitable opportunities.

Now, both unrealistic expectations and lack of emotional control forces an investor to commit the third biggest sin which is ‘overtrading’. After a year of entering into the markets, dealing with tons of emotions, and seeing his or her expectations not getting fulfilled, an investor may be bound to overtrade in the markets. Overtrading occurs when an investor makes too frequent trades in the markets and commits capital which is way beyond his or her losing capacity and after a person has committed capital more than his or her tolerance capacity, he or she has no choice but to fall into the 90% trap. The three factors combined together provide the perfect path for an investor to enter into a damp pit from which there seems no exit.

And as they say, “save the best for the last”, the one factor that’s prominent in most investors and runs throughout all the stages of investing is the ‘lack of education and knowledge’ while investing in the markets. Most people believe that stock markets are a place where quick money can be made in no time. They buy a stock believing some tips that they get from anonymous sources, but when asked do they know what the company even sells to earn its revenue?, the answer is a ‘blank smile’. And this isn’t the story of one or two individuals but the story of every second investor investing in the markets.

Conclusion 

Many people say, “Stock Market is not made for me“, however in reality stock market isn’t made for any particular individual or organization. Being a part of the 10% isn’t possible for everyone. People who succeed in the markets, aren’t born with the ability to trade in the markets but with persistent efforts, training, and knowledge, they separate themselves from the larger pot. To be a part of the 10% is to devote your 100% to the market. People who have the ability to trade rationally in the market, have the ability to control their emotions coupled with the right intentions and a blend of a good amount of knowledge are the only one who succeed in the market. The ideology whether you’re investing in the company or you’re just investing in its stock, makes the difference of the world. The desire to become a millionaire overnight is what kills the majority of investors.

I would like to end this article on an insightful note: 

“The stock market is filled with individuals who know the price of everything, but the value of nothing” 

 -Philip Fisher  

References used: 

https://www.google.com/url?sa=t&source=web&rct=j&opi=89978449&url=https://www.moneyshow.com/articles/tradingide a-60554/why-90-of-traders-lose-money/&ved=2ahUKEwjuobDxgZaCAxXhhGMGHaH-C oQFnoECCgQAQ&usg=AOvVaw0EvQgZr84R091QVFY03lfK 

https://www.google.com/url?sa=t&source=web&rct=j&opi=89978449&url=https://www.wealthwithin.com.au/learning-centre/share-trading-tips/trading-the-stockmarket&ved=2ahUKEwjuobDxgZaCAxXhhGMGHaH-C oQFnoECCQQAQ&usg=AOvVaw030k3Uit_9QqUHYbBVYzw8 

By Garvit Bansal