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02/09/2011 01:54:53 AM · #1 |
You may find the title a little weird, but... read on.
Please do leave a feedback.
Why you must lose money in the Stock Market!
Most people must lose money in the stock market most of the times, so that a few people can make money most of the times.
Stock market manifests the cycles of Greed and Fear. Buyers buy at a higher price when they feel that the prices are going to go up. This drives the prices up. Sellers sell at a lower price when they feel that prices are going to go down. This drives the prices down. A major bull and bear market cycle may take several years to complete. In between this major cycle, there may be several intermediate cycles.
Stock Market does not believe in taking the shortest path. It often goes from 3000 to 8000 via 21,000. It does not happen overnight; the major Bull and Bear cycle may take 5-6 years, or sometime a decade. Everyone would like to buy at 3000, sell at 21000, again buy at 8000â€Â¦ and so on. But few people achieve what can be called a better than average return from the stock market.
You cannot lose much money in the stock market, if you follow this simple rule: Buy, when dollar bills are available for 50 cents, and sell when the major up-trendline (established over a period of 3 years or more) breaks. Don̢۪t get me wrong. If it were so easy to make money in the stock market, I would not be writing this article. I would be spending my holidays on an exotic beach.
To do what has been postulated above, you need an iron will and steel finances. The major difficulties with this approach are:
1. Dollar bills are available for 50 cents only once in a decade. If you have lost the last opportunity, you may have to wait till next decade. Most people cannot stand to wait that long.
2. Even when dollar bills are available for 70 cents, most people would try to jump and grab them, because there is no guarantee that they will be available for 50 cents. Who knows, they may just drop to 60 cents and then start appreciating in value!
3. Even if you have managed to buy dollar bills for 50 cents, they may fall in value to say 40 or 35 cents. The market may appear to have lost its base and most weak at a time, when actually it is the strongest! Most people cannot stand this, and quit exactly at the wrong moment.
4. Supposing, you have managed to buy the dollar bills for 50 cents, they appreciate in value to say 80 or 100 cents within a year. Most people cannot resist the temptation to book profits. After all, they have almost doubled the money within one year! Their prophecy comes true when the market takes an intermediate correction, and they give a pat on their back.
5. After the initial fast advance, the market tends to consolidate at this level. During consolidation the value of dollar bill may fluctuate between 90 cents to 120 cents. It is especially hard to resist the temptation of booking profits (or losses) during the consolidation phase.
6. The major uptrend line gets established after a period of about 2 years. This trendline would last for 5-6 years, and sometimes a decade. Most people would watch the daily (and hourly) fluctuations, and cannot afford to wait that long.
7. The stock market may lose 10-25% in value several times even during the major uptrend! There are no reliable means to determine how big these corrections would be. The dollar bill may rise to 150 cents in value and then drop to 110 cents during these corrections. It is emotionally difficult to see your money rise and fall so many times in value. Most people tend to think – ‘Had I exit at such and such level, and re-enteredâ€Â¦ I would have made a lot of money’. This leads to the tendencies of speculation.
8. Stock market appears to be most attractive when it has appreciated 5 times in 5 years. The figures of raging Bull appear on most magazine covers and financial reports. It becomes emotionally difficult to part with your portfolio when the stock market is literally pouring dollars into it. If you have wrongly sold at 18000, you tend to buy again when the market touches 20000. It doesn’t matter if the market drops to 16000. A 20% correction does not seem to matter much. After all, you have seen many corrections of the similer order earlier, and you justify – Stock market has emerged stronger every time after the correction! But the fact remains that every major crash starts with a small 10% correction.
The market takes a crash, â€Â¦and the cycle begins again.
Message edited by author 2011-02-09 05:37:02. |
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02/09/2011 09:11:40 AM · #2 |
In many ways, the stock market becomes a self-fulfilling prophecy of whatever the mass mentality thinks is going to happen.
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02/10/2011 01:53:35 AM · #3 |
You may also like the story... "DUMMY DOLLARS".
This is how the Stock Markets evolved!
Dummy Dollars!
Long long ago, some Nobles gave a unique idea to the King – We should have a currency that does not have any fixed denomination. It should be exchangeable in the free market as per demand and supply. The king found this idea interesting, and ordered to issue a currency, named Dummy Dollars. This currency was identical to the existing currency, with the only difference that it didn’t have any marked value. In place of its denomination, an empty circle was inscribed, which meant that its value was to be determined by the open market.
The issue price of Dummy-Dollar was One Dollar. On the first day of its launch, the entire stock was sold out. Everybody bought Dummy-Dollars as per their capacity; the rich naturally bought a lot of them. Now onwards, the price was to be determined as per supply and demand.
Next day, the Nobles announced a price of 110 cents for each Dummy Dollar. A few people were happy to make an immediate 10 percent profit. Others cautioned them – ‘You should have waited. They will appreciate further in value.’ But they didn’t listen. After all, 10% profit in one day was not a small profit!
The next day, Nobles announced a price of 120cents. ‘It’s not fair’- cried those who had sold their stock the previous day. They should have agreed to the advice of their smart friends, who were now getting 20 percent profit. But, some more smart people knew that the demand for Dummy-Dollars and the resulting up-trend is likely to continue. They decided to hold on.
For next few days, the Nobles announced a price of 140 cents, 150 cents and 160 cents. Those who had sold the Dummy Dollars for 120 or 130 cents decided that they would buy them again, in case the price comes down to 150 cents.
Now, most of the stock was with the Nobles. They declared a price of 150 cents. This came as if a god-sent opportunity; those who had sold it for 120-130 cents, again bought the Dummy-Dollars for 150 cents.
Next day, the Nobles announced a price of 120 cents. ‘What is this? How can the price fall so sharply in one day’ - resented poor people. ‘You can sell them to us or buy them from us at this price. It’s a fair market’ - said Nobles.
Next day, the Nobles announced a price of 90 cents. Those who had bought it at 150 cents, smacked something wrong, and sold the Dummy-Dollars for 90 cents. Others, who felt that the price was right to buy, as it was lower than even the issue price, bought a lot of them.
The next day came as a bigger surprise, when Nobles announced a price of 50 cents. ‘After all, it’s a paper currency. What if the king discontinues this currency? It will be thrown on the streets like waste paper. As a gesture of goodwill, we are ready to pay you 50 cents’ - they told the poor people. Poor people believed them, and sold their Dummy-Dollars for 50 cents.
The next day, the Nobles announced that the rumour that the king might withdraw the currency was wrong, and the current price of Dummy Dollars was 100 cents again.
This cycle continued for several centuries.
â€Â¦and this is how the stock markets were evolved.
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02/18/2011 12:29:59 AM · #4 |
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