Myths and Misconceptions Held by Market Players

Whether investing in shares or mutual funds, frequent errors made by market participants while investing in the equities market were highlighted in my previous piece. Among the errors we mentioned were several that were enabled by dishonest market manipulators who might evade regulatory action.

 

However, there is also no lack of market players making blunders that they brought about themselves. To begin with, incomplete information derived from haphazard reading or watching television has the potential to be a weapon of mass devastation in the market.

As an example of such incomplete information, I still find it amusing to go back to a few years ago when I met a market participant who traveled from Bangalore to visit me and provide me with a portfolio holdings sheet that included around 350 companies and mutual funds. He told me that in order to “diversify” his portfolio, he adopted a “beverage investing” technique that he had read about and internalized. He told me that his wife, who works as an IT specialist and is as passionate about the market as he is, has over 250 equities and mutual funds in her portfolio.

Regarding equities and mutual funds, there are plenty of market players who vouch for the fact that they only purchase blue-chip stocks and mutual funds. By “blue-chip,” they most likely mean large-cap stocks and funds classified in accordance with the regulator’s standards. Therefore, it is obvious that they are copying the actions of the mutual fund scheme’s fund manager, who has the resources to do it far better. Thus, the act of duplication undermines the fundamental goal of “diversifying.”

Another, more basic, but self-inflicted error made by market players is to completely disregard their asset allocation strategy and the need of rebalancing when the markets swing to either extreme. As a result, when the market begins to show indications of deterioration, many investors get panicked and just resign out of their SIPs and, in some extreme circumstances, all of their stock assets.

Not to mention at the worst possible moment. When stocks rise significantly, many people resist making the sensible adjustment of stepping down a gear or two on the risk ladder while still riding the wave. It’s impossible to predict how this “merry-go-round” experience will ultimately turn out for these market players.

Lastly, there is a perception that retail market participants bear the majority of the blame for financial losses resulting from these self-inflicted errors. Rethink your thoughts. Exotic “weapons of mass (wealth) destruction” are always available to market players who identify as High-Net-Worth Investors (HNIs), and there is no lack of those willing to bite the bullet and fall for the bait without thinking it through.

The main distinction between these so-called HNIs and retail players is that the former are often reluctant to voice their dissatisfaction or reveal to the public how they allowed their cash to be taken from them.