3.Simple analysis that surprisingly few market participants understand.

Here's a quick analysis that surprisingly few market participants understand. 

Assume you start with a capital of 10 lakhs in Year o and earn a return of 100% per year for the next ten years. You'd have a whopping 102.3 crores at the end of Year 10. 

That is the power of compounding, but hold on a second ;( However, in year 11, you become overconfident and incur a 100% loss. You end up with nothing. Nothing. "You lose everything you've earned over the last ten years." 

The whole point of investing is to figure out how to avoid losing everything. As a result, risk management becomes critical. 

"Remember, you can make a thousand % profit or even more, but you can only lose 100%."

Most people believe that in order to succeed in the stock market, one must be skilled at analysing stocks and selecting the best ones. 

However, few realise that this skill is secondary. 

RISK MANAGEMENT is the most important skill for success in the stock market.  

Here is an important tip. Before purchasing a stock, check all social media platforms to see if everyone is talking about it. At that point, it's probably not a good buy. 

You can actually avoid losing 100% by following a few simple rules.

1. Never invest in stocks during a stage 4 downtrend. Regardless of how strong the fundamentals are.

( Link - Stage analysis )

2. Always cut your losses while they are still manageable. losses work exponentially against you.

A 10% loss can be recovered by making an 11% profit, but a 50% loss requires a 100% profit, A 70% loss will require a 233% profit to be recovered.

3. Avoid bear markets.
While most people are unable to understand bear markets due to a recency and confirmation bias, bear markets can be brutal.
Many stocks that fall during a bear market never recover to their previous highs.
And bear markets can go on for longer than most people expect and can cause losses larger than most people can afford.
The safest bet is to avoid bear markets.

Think of it this way -
if you see a speeding bus headed your way. What will you do?
Will you move out of the way?
Or
Will you stand there and hope the driver will press the brakes?
And retail keeps buying falling stocks from promoters and institutions because of the cliche of "buy low, sell high."

There is a common misconception among retail investors and even some "value investors" who have read only one axiom and now call themselves value investors.

The misconception is that stocks that create a new 52-week low are good buys. This is the second-worst mistake after averaging down a falling stock.

Just to clarify, I am not implying that all stocks that create a new 52-week low are going to zero. But stocks making new 52-week lows are weak stocks that are witnessing institutional selling. Money is not made by buying weak stocks that are being sold by institutions, but by buying strong stocks that are being accumulated by institutions.

With these closing thoughts, here is wishing you all the very best!

In the next blog, we will understand the most important factor of any financial market: liquidity.