Should I Invest in Mutual Funds of Nepal?

5 Things People Misunderstand About the Stock Market: A Personal Rant

You’ll have to listen to two people talking about the stock market to witness the many flaws that people have about the stock market. Thanks to the latest IPO hype and NEPSE’s bull run, these conversations can be heard in tea houses, barbershops, and even inside Kathmandu’s smelly gas-powered blue tempos. Ugh, I hate them, the tempos.

I do not know how anyone will ever benefit from my personal rants that I post now and then when I feel like it. Unlike other carefully crafted articles, my rant articles are written just for the sake of writing. Read this one just for the sake of reading them, I guess.

Misconception 1: People think market experts are better market predictors.

They are not. They are better risk managers.

As a beginner, it is tempting to learn all the right strategy and theories so that you can easily see the next big move coming. I hate to be the one to disclose the truth for you, but a 100% accurate strategy does not exist.

In the game of investing, all we try to do is to put the probability in our favor. We try to be right more times than we are wrong. The way to put the odds in our favor is by choosing a working strategy, sizing our position properly, and taking just the right amount of risk that is needed.

Misconception 2: People think the stock market does not contribute to the economy.

Before I even list down my arguments, perhaps I should start with the fact that investors pay a 5% capital gain tax on every profit they take from the market.

Coming to the point, some people think that the stock market is a zero sum game. Buyers buy and sellers sell, and the company or the government do not benefit from a transaction.

However, one has to realize that investors ARE the company. The company earns a profit and contributes to the national economy because of its operation. Its operation is made possible by the investors. The company promoters, public shareholders all contribute by giving the company its lifeblood: capital. But some will still argue that capital is contributed via the IPO process which is a one-time thing. This is why they might think that trading shares and speculating in the secondary market is an unnecessary process.

In response to that, let me clarify that the purpose of trading facilitation is to create liquidity. Investors who invest via an IPO can ask for their money back and the company does not have to stop midway and return him his investment. Instead, the secondary market allows the company to transfer ownership from the previous shareholder to another buyer.

Furthermore, the free market rule of supply and demand in the secondary market also gives a better picture of the company’s valuation than if it was done by a single analyst.

Misconception 3: People try to compare investing with a job.

You entered the stock market to have other-worldly gains. To only have a monthly salary as your financial pillar is to depend on a chair with only one leg, you thought. That is why you entered the stock market in the first place; to diversify your finances.

Despite this, people still expect their investment to be like their job. They want to profit every day of every month. Unless you are lucky, that rarely happens in the stock market. You have red days and you have green days. Your work is to learn a strategy that hopefully gives you more green days than red days.

Also, there is another way how people compare investing to a job: they expect to always be invested in the stock market. However, there are times when you have to buy and times when you have to get the fuck out. The grass is not green in every season. In a given time frame, the best opportunities may all come at once in a particular segment of that time frame. Also, at any given instance, there are only a handful of stocks that are worth pursuing.

This is why diversifying and investing at regular intervals without assessing the market trend give mediocre results.

“Diversification is a protection against ignorance, it’s a confession that you don’t understand the businesses that you own.” 

Warren Buffett

Misconception 4: People forget that the market itself is the greatest judge.

Bring a fundamental analyst and a technical analyst in the same room and they will start pulling each other’s hair out. These two groups are always angry at each other. Each wants to prove that they are right and the other party is wrong.

Why keep debating whether it is Sunday today when you can look at the calendar and find out?

You are here to make money, not to be proved right. If you believe you have a working strategy, put them to work. Your performance and portfolio returns will speak for themselves. The market is the greatest judge of your effectiveness, and also of your investing strategy. Avoid toxic debates at all costs.

Misconception 5: Investment strategies do not work in Nepal’s stock market.

Fundamental analysis works for every entity that does business and prepares a balance sheet. On the other side, technical analysis works for every interaction between buyers and sellers governed by demand and supply.

These strategies work in the context of Nepal too. Anomalies are everywhere, and if you want to negate every argument with an exception, you are going to win every time. But you are also going to be invited in fewer and fewer healthy discussions every other time.

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