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Why only 5% investors make money in market when returns are available to all

One investor gets good returns from the stock while another sees a loss on the same.

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Last Updated: May 22, 2020, 02.10 PM IST
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One of the main sentiment and feeling that needs to be controlled is the fear of loss.
By Prashant Dhama

A Crisil report of 2017 said the average return of a diversified equity investment in India has been around 18 per cent CAGR since 1997.

Another report by Dalbar Associates, which compared the returns provided by S&P500 and actual average return attained by investors, found a significant gap between the trajectories of these two returns. Over last 40 years, investors have historically managed to get less than half the return that was otherwise freely offered by S&P500. The same story holds true also from Indian perspective, where the market has provided an equal and free-of-cost opportunity to all investors, yet, the majority of them have not been able to get it. Why?

To analyse this, let’s understand how equity performs and generates returns. In the long run, equity market returns depend on corporate earnings; as earnings rise, prices of shares also rise. This is a simple proposition. However, in the short term, it is the sentiment that drives the market. So share prices become equal to earnings + sentiment. Earnings are declared every three months, but share prices change every day, every minute and this happens because of a change in sentiment. One investor gets good returns from the stock while another suffers a loss on the same.

Why does this happen?
The most successful investor in history, Warren Buffett, became the richest person by investing in equities which were available for all, his shareholding list was available to all, and even today, his equity holdings and all the other information are easily available to industry experts for in-depth analysis. But very few investors get equal returns by investing in the same shares. So it's not about research, market analysis, or knowledge, but rather it's our sentiment which decides our returns. That's perhaps the reason that most successful investors talk more about behaviour and sentiments than research.

How does sentiment decide our returns?
One of the main sentiment and feeling that needs to be controlled is the fear of loss. The human mind partly processes the pain of loss of money in the same way in which it processes the fear of death. This is the reason we are very afraid of losing money. That's also the reason people get more returns from intangible assets like gold or real estate than that equities, even though equities give far better returns. The primary factor here is our own sentiment.

So, our sentiment is the key to our success as an investor. But alas! the majority of investors give more importance to research and analysis.

(Prashant Dhama is Founder of TradeScience, a wealth management company that specialises in maximising investment returns using Quant strategies. Views are his own)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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