Anyone who is involved in the stock market wants to make huge money. The successful five to ten percent investors or traders might be the reason behind this motivation or fascination, if you allow me to call it. But sadly, majority of the participants have been losing money in the stock market. There are some mistaken beliefs amongst the investors and traders which are responsible for their losses. There is no other sound reasoning behind these beliefs except the investors’ own emotional bias. Here are those ten unreliable myths which you need to get rid of as your first step towards success.

It Is Oversold, It Can’t Go Any Lower Than This

Most investors are introduced with the term ‘oversold’ as they gain interest in stocks. They either hear it first from business channel analysts, from brokers’ newsletters or from a youtuber. Analysts draw this information with the help of various technical or fundamental indicators such as RSI or PE etc. What new investors infer from this information is that if some stock is oversold, it tends to rebound. Means it should not go down any further. Next time they hear about such a stock, they just hop-on to buy it believing that it is bound to go higher now.

They remain ignorant of the fact that a stock may stay in the oversold zone for much longer than expected. This may not happen always but still in many cases the stocks may show this kind of behavior. We may also see huge price deterioration while a stock is still oversold.

In the above example of VEDL, if we use RSI indicator to draw oversold/overbought zones, the stock went oversold in July 2015 when the RSI tripped below 30. An RSI below 30 is considered as an oversold condition and above 70 is considered as overbought. The closing price was 158.55 on that day. Two sessions later, the stock hit a low of 137.85 and RSI went 17.6. It looked deeply oversold. Any impatient investor would have bought it with both hands thinking that the price could not fall any further. But the stock could not hold that level and made a new low of 76.7 when the RSI was only 12. So, the price stayed in the oversold zone for about two months and the price slashed 50% from 158.5 to 76.7. The investments made at 158.5 would have halved and made it psychologically impossible for investors to hold that big loss.

“No low is too low for the poor fellow.”

It Is Overbought, It Can’t Go Any Higher Than This

Conversely, a stock can remain in an overbought territory for longer than you can ever imagine. Not only that but the price may shoot up in multiples. In the following example of Aurobindo Pharma, the stock became overbought on 79 RSI at a closing price of 130. The RSI went 84.3 but the price still made a new high of 143.95. The stock stayed in overbought territory for almost two months. It shot up to 207.2, that is 75% from 130 closing, while the RSI had risen to 90.7 at that time.

From the above examples it becomes clear that anything that is oversold may still go lower and anything overbought may still go higher depending upon the market conditions and the company’s fundamentals.

“These two fundamental conditions may influence the price for much longer than one can anticipate.”

This Must Be the Bottom for This Stock

GMR Infrastructure went up from 19.6 to 132.35 in less than one and half year time. Then it corrected to 54.5 in Jan 2008. This level coincided with 61.8% retracement of the entire 574% move from Aug 06 to Dec 07. The strong buying and long wick on the chart at that level signaled as if that could be possible bottom. Also, the PE would have undergone a deep cut due to sharp fall in price. That would have attracted both technical traders and fundamental analysts. The stock gyrated above 55 for about five months. Everybody must be convinced that the bottom is in place, until the stock finally broke 54 in June 08. Prudent investors would accept their mistake at that point and cut their positions at loss, thinking it as one of their wrong investment decisions. However, the stubborn investors would like to stick to the trade. Later the stock made a further 60% cut from 54.5 and made a low of 22.3 in Oct 08. Actually, it did not even stop there and made a new low of 9.75 in Feb 2016 (see 12month chart). Just imagine someone who bought at 55 thinking it as bottom and held for 8 years while the stock never made any brave attempt to touch 132 highs.

“Nobody knows where the bottom would be, until it is actually in place.”

Hmm... Penny Stock! Buy Huge and Get Rich Quick

There is a misconception among the traders that if they buy something cheaper, they would not lose much. Perhaps majority of investors and traders like to buy small priced stocks because they feel safer with these stocks. They think that they can buy a penny stock and make big money as the stock goes higher. They start dreaming that the stock would touch the moon and make them super rich in the next couple of months or years. Most of these dirt-cheap stocks have been the investor’s or trader’s favorite in the past. That is why they retain good memories of the past.

It reminds me of Unitech (see 12 monthly chart), a realty stock, which had a four-figure price pre-2008 correction. It made 1200 times return to the investors in Jan 08 from its lows in 2001. Thereafter, the company had to face a hard time. The stock made a low of 0.35 in Oct 09 and currently trading at 1.75. As the stock has good memories in its background, many traders still bought it at 20 or lower, thinking that they are buying a four-figures stock at a much cheaper price. But that does not always happen. Over a period of time the company’s fundamentals may have deteriorated and that can keep the price down forever. A large number of investors lose their money when such stocks get delisted from the exchange.

“There is no shortcut to make money in the stock market.”

I Missed a Huge Rally, I Can’t Miss All of It

Lack of patience, fear of missing out and greed are the main reasons for traders losing money in the stock market. It is not the market itself that cheats investors but the investors’ own mindset. It would sound familiar to you. You as an investor would have been observing a stock for some time when finally, it starts to rally. You are still not sure if this is still pulling back-up in the downtrend or reversing, so you wait. The stock keeps on rallying and is 50% up from your point of observation. Now you are convinced that the trend has changed. But the price seems a little on the higher side so you want to buy on a small correction. You keep on waiting but the stock is up 65% from your point of observation and also at all-time high. Now you get impatient thinking that you missed the entire rally. You press the buy button at the top with everything that you have, just before the stock starts reversing down.

“I am afraid to call an impatient market participant as an investor. If you have missed the entire rally, there is no point in risking your capital at the top of the rally.”

It’s Not Going Anywhere, I Should Exit

Stocks would always test their weak holders and strong holders. They would move at their own pace and not at investor’s will. Many investors would buy a stock at a good price/valuation but later get annoyed during the price consolidations. These accumulation or consolidation periods may take much longer time and irritate investors who want faster results. They would hold the stock for the entire consolidation phase and then exit just before the rally at a marginal gain.

In such a situation, an investor needs to rethink before exiting that why did he buy the stock at the first place. Was it due to the good balance sheet or cheaper valuations or a business monopoly? Company’s fundamentals do not change in few days or few months.

“If the company is still doing a good business then there is no reason to exit. There is need to give it enough time before it generates profits for you.”

I Knew It Will Come Down, I Am Going to Buy More

Not all investments work. There will be good investments and there will be some bad ones. The good ones may not yield immediate returns but bad ones may have an immediate impact on your portfolio. In fact, a poor investment if kept for long may become a bad apple in the basket. There could be many reasons for such a mistake like inaccurate analysis or indiscipline etc. Some investors like to nurture such a bad investment. They start feeding their ego thinking that they could not be wrong; the stock had to come down and they knew it. They start adding more shares at a lower price. Earlier they took a bad decision but now they are committing a mistake. Even they like to exit from a good profitable trade to buy more stocks in a bad investment. This is like multiplying your mistakes. Eventually they stuck a large part of their capital in an unpleasant situation.

“I would like to add to a winner rather than in a loser.”

I Will Exit If It Comes at My Cost

In the above scenario, when the capital got stuck in a stock for longer duration, the investor decides that he will exit as soon as the stock comes back to their breakeven price. Breakeven is the average buying price of a stock. The investor has already exited from a good stock; averaged down this bad stock; and now he is disparate in taking out his capital from this stock. But trust me, such a stock would never come to his breakeven price. If his breakeven is 200, the stock would touch 190 and reverse.

“There is no better way to deal with a bad investment than taking a small loss on time.”

I Was Intentionally Misguided

Most traders would immediately like to take credit for a profitable trade. But when it comes to losses, they would start playing the blame game. They would make an excuse of being misguided by a friend, relative or an analyst from a news channel. It’s like consoling oneself for making a loss. They just don’t want to take full responsibility of their trading decisions. In reality, no one can force anyone to take a trade. Your trading decision may be influenced but you have to take responsibility of pressing the buy or sell button. If this habit is not taken care of, you will always hold someone else responsible for your loss and keep on repeating the same mistakes again and again. This would hurt your learning process in the long run.

“The irresponsibility habit should be nipped in the bud at the very beginning. The habit satisfies ego but the losses would only be made from your pocket.”

Stock Market Is Not for A Guy Like Me

After practicing all the above fallacies and repeating the same mistakes again and again, the trader/investor gives up saying that perhaps stock market is not his cup of tea. Sadly, this is the lesson that majority of the traders learn after making consistent losses in the market. They could have done better if instead of adopting a money-making approach, they would have adapted to the learning process. The learning process that involves studying books, following discipline, cutting losses, booking profits, taking responsibility for your actions etc. Stock market is for business. First learn this business and then do the business. In the learning process you may lose some percentage of your capital but with focused approach it will help you to make this business favorable.

“Stock market is not for everyone, it is for those few disciplined slow beings.”

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