Top 7 Stock Market Mistakes to Avoid: Insights and Psychology Behind Investment Failures

In the world of the stock market, everyone likes to talk about multi-baggers and people who created wealth like late sir Rakesh Jhunjhunwala.

But tell me, friends, what about the failure stories? Every year, millions of people in India end up losing money in the stock market, but nobody likes to talk about it.

There's a very good saying: we can learn more from our failures than success.

So in this article, I have curated a list of 7 common mistakes people make in the stock market which result in people losing money.

Then, I have dug deep to identify five major human psychology factors that are the root cause of all the problems.

Common Mistakes

Investment in Penny Stocks.

Many people have an obsession with penny stocks. They think that when they invest in penny stocks the downward risk is very low.

For example, if they invest in a stock worth rupees 5, they think that at most they would lose 5 rupees per share, but the upward potential is huge.

But, 1 out of 100 penny stocks has upward potential; the rest all have downward risk, and How much can you lose? You can lose all your money. Generally , I asked many people why they like penny stocks, and many of them said that they like to get high units. This is again a huge misconception.

For example, there is a share A worth rupees 10, and there's another share B worth rupees 1,000. Now people think that if they invest rupees 10,000 they will get 1,000 units of share A and only 10 units of share B, so let's invest in share A. But, this is not the right way to invest.

In fact, share price has got nothing to do with valuation. A share worth rupees 10 could still be overvalued than a share worth rupees 10,000.

For example, MRF is a classic case. It is currently trading at rupees 1,32,450.00, but it is still reasonably valued.

Yes, it is not that much overvalued even at rupees 1,32,450.00 per share.

By the way, do you know which is the costliest share in the world? Some of you would have guessed it, it is Berkshire Hathaway, the company of Mr. Warren Buffett. Do you know the price of one share of Berkshire Hathaway? It is 6,71,280.00 USD. In other words, it is 5.37 crore rupees. Yes, one share is worth 5.37 crore.

So share price has nothing to do with valuation. Majority of people lose money because they end up investing in penny stocks.

No Idea of Valuation

What is valuation? If I ask 100 people, the majority of them have no clue about valuation. They just invest because they think that the share is good or someone suggested the share. But , valuation is the most important criteria along with the fundamentals of the company.

No matter how good a share is, no matter how good the future growth potential is, if the share is super expensive it won't give you high return in the future. Majority of people lose money because they end up investing all their money in super expensive stocks without looking at the valuation.

Follow the Herd Mentality

This is the biggest problem in our country. Majority of people end up investing in companies where their colleagues have invested, friends have invested, or relatives have invested.

It is like "Dubenge to saath me". On a serious note, I have seen many people simply investing on tips from friends, family members, or colleagues without even knowing anything about the company. They have this blind faith, again a major reason for losing money.

People Look for 52-Week Low

Many people have the tendency to invest when the stock touches 52-week low.

"Bhai stock 52-week low pe hai, saste me mil raha hai, le lo." It doesn't work like that.

You can't simply avoid a stock just because it is at a 52-week high or can't simply invest just because a stock is at a 52-week low.

But on the other side, there are also people who just invest looking at high returns in the past. They invest when the company has already given bumper returns.

No, both approaches are wrong.

A stock at 52-week low could even fall further if the stock is fundamentally weak. But if a stock has fallen to 52-week low due to external reasons like COVID and the stock is fundamentally strong, then it makes sense to invest. Majority of people end up investing in poor quality stocks at 52-week low, and a stock at 52-week high can either fall or rise based on the fundamentals of the company and future growth prospects.

People Avoid Quality Stocks

I don't understand why, but people have this urge to identify hidden gems.

"Yaar sabko pata hai, yeh achha stock hai, isme kya maza aayega, hume toh hidden gem dhundhna hai." There is another problem. People not only avoid high-quality stocks but end up investing in poor quality stocks, and when the share price falls, they invest even more to average out the price. investors , this is a recipe for disaster.

Investing in Day Trading and F&O.

Many people want to make quick money in the stock market. As a result, people end up doing day trading and even invest in futures and options. Investors, I've already mentioned that day trading is not everyone's cup of tea at least I am not made for it . You need to be a professional trader.

Many people lose money in the stock market as they end up investing money on day trading and especially in F&O by buying huge lots on leverage and even borrowing money from others. When they lose money, they invest more with a hope to recover their lost money and end up losing even more.

People Never Learn from History

For example, if today's Sensex is at 81,343.46, people think that it will only go up. But my fellow investors , if you look at history, you would know that if the market rises, it also falls, and when it falls, it eventually rises. People today are going gaga about technology stocks. They are willing to buy technology companies at any valuation. I am not saying that they are bad, but if you look at the 2000 dot-com bubble, there was a time when every internet company was attracting super expensive valuations even without any profitable business model. Eventually, the bubble burst and people lost money. So don't just invest in a company because it is a technology company. Look at the financials, business model, and of course, the valuation. Likewise, today everyone wants to apply for IPOs.

"Yaar IPO hai, apply kar do, list hote hi paisa ban jayega." Not every company that goes for an IPO is good.

As I said it earlier, There is no fixed formula for Stock Market Success. It is more of an art. If investment was all about finance and numbers, every finance and economics professor would be a billionaire.

The biggest factor that decides the success or failure in the stock market is human psychology.

Top 5 Psychological reasons why people lose money in the Stock Market

Thrill / Adventure

People need thrill. Investors , listen to me carefully and understand this human psychology. If I give you two options of investment, first is a Nifty 50 index fund that can give you an average of 10% annual return for the next 10 years versus an active mutual fund that can either give 15% return or can also give 5% return,

What would you choose? The majority of people would go with the active mutual fund because if you know an average 10% return, then there is no thrill. On the other side, even if there is a slight chance of 15% return, then you want to take that chance even though there is a huge downward risk.

This is the reason why index funds are not so popular in India. On the other side, if I tell you that a stock can give you an average 20% return for the next 10 years versus a stock that can either give 100% return or can also give a negative return, then the majority of people would go with option two.

Desire to Become Rich Quickly

Now, I want you to answer this question: would you like to earn 1 crore in the next 1 year or 1 crore in the next 20 years? The majority would say 1 crore in 1 year, and why not? We all want to be rich quickly, and that is the biggest reason for losing money in the stock market. People want to become rich overnight. They want quick success. As a result, they end up investing in risky stocks with a hope to earn quick money and end up losing it all.

Inability to control emotions

We, humans, are emotional creatures. We just can't control our emotions. When people see a stock price rising, they can't control their emotions and end up investing at a super high price, and when the stock falls, again, they can't control their emotions and sell the stock in panic. People just can't control their emotions, and that is the biggest reason for losing money in the stock market.

Following the crowd

The majority of people have the herd mentality. People just end up investing because everyone else is investing. They invest in companies where their friends and family members have invested. It is like, "Dubenge toh saath mein." This herd mentality is the biggest reason for losing money.

Lack of patience

Investment requires patience. You can't become rich overnight. People invest in stocks with a hope to earn quick money, but when they don't get quick success, they lose patience and sell their stock. Investors , I have seen many people losing money in the stock market because they just don't have patience.

It has no relation with your stock pick in the same stock one make multi bagger return while other lose its hard earn money. It is just because of patience

Conclusion

Investing in the stock market offers incredible opportunities for wealth creation, but it also comes with risks that can lead to significant financial losses if not approached wisely. By understanding and avoiding these common mistakes—such as investing in penny stocks, ignoring valuations, following the herd, mistiming investments, avoiding quality stocks, engaging in day trading and F&O, and ignoring historical trends—you can enhance your chances of success.

Remember, investment success is not just about numbers; it's deeply intertwined with human psychology. Stay patient, do your research, and make informed decisions.

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"The stock market is filled with individuals who know the price of everything, but the value of nothing." – Philip Fisher

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