Motilal Oswal Explains Why Investors Fail To Make Money From Stock Market

The Stock Market Paradox – Why Most Investors Struggle

For many, the stock market is a source of revenue that can be leveraged. However, many retail investors do not seem to be profitable over a period of time.

While some investors do make gains in the short run, most end up incurring losses or very little returns on their investments during the long run. This paradox poses a very important question: Why are so many investors unable to build wealth in the stock market?

Motilal Oswal who is the chairman and managing director of Motilal Oswal Financial Services, one of the biggest brokerage firms in India also, has often pointed out the oversights investors make and populary ‘forever’ documented their blunders.

He offers a thorough picture of what not to do and how retail investors can switch their strategies to be successful over time. In this piece, we outline the key ‘flaws’ behind the investors and fail, with the expert assertions of Oswal, and what needs to be done to make them get it right.

Impatience and Lack of Vision

Certain invetors lose out on wealth creation by mere forth in the stock market. As pointed out by Motilal Oswal, ‘building wealth with equities is a slow burn’, and he reiterates again that most investors do come with a short-term vision anticipating speed.

The Power of Compounding — An Overlooked Phenomenon

Oswal is passionate about the idea of compounding and its importance for stock market investors. He explains that consistent investment over a long period generally can yield exponential returns because of compounding.

Sadly, the reality is that most investors do not truly understand this idea or do not possess the requisite patience to allow it work for them.

Consider a hypothetical example of an investor who invests ₹1,00,000 in a stock that grows at 15\% per annum for a decade. In this case, he will have approximately ₹ 4,05,000 in his account after 10 years.

However, a lot of investors do not have the necessary patience to stay invested and exit well before this period, therefore losing out on the eventual upside.

Short Term Speculation vs Long Term Value Creation

Retail investors often tend to fall into the trap of speculation by buying and selling stocks regularly to take their chances with market movements. This short term focus for capturing profits leads to a higher level of costs and minimizes the capability of wealth creation in the long term.

The irony is that, equities possess the greatest level of returns but these type of forms of trading leads to missed opportunities, thus, denying the investors the true benefits of equity investing.

Emotional Decision Making

Oswal explains that the stock market is largely determined by biology, with behaviorism deeply interwoven with psychology. For many people, the biggest influences on their investments tend to motivation, desires and deeply rooted emotional elements of greed and fear.

Greed In Bull Markets

During bull runs, fear of missing out drives investors into a frenzy. This results in overvalued stocks and are purchased. These stocks are bought in bulk due to over-optimism of the bull market. When the market corrects itself, these stocks result in losses for the investors.

Panic Selling In Bear Markets

On the contrary, in a bear market, panic selling takes center stage. Investors lose their cash value as the market depreciates. Because of panic, investors end up selling their stocks. This explains why it is easier to lose money than make money. Oswal mentions that these investors not only lose money, but do not gain anything in the market jump.

How to Stop Emotional Investing

Staying discipline and rational is key, Oswal offers:

Approach over the long horizon: Ignore all market sentiment over a short period.

SIPs: With Systematic Investment Plan, volatility of the market does not affect the investment.

Managed funds: Investing in mutual funds removes emotion-driven buy/sell decisions.

Neglect of Proper Research and Excessive Dependence on Tips

The absence of research stands out as yet another prominent reason for investor failure. A large number of retail investors accept stock tips from a family member, friend, or even an obscure online individual instead of trying to conduct research on their own.

Chasing After The Hype

As Motilal Oswal shows us, trying to follow market fashions or tips from unverified individuals is self-defeating. Investing based on hearsay or speculation is always bound to lose.

For instance, a lot of inexperienced investors jumped on trending stocks during the rush in 2020-2021. They bought these stocks without evaluating the company’s fundamentals. They suffered losses in 2022 because the market corrected itself.

The Importance Of Underlying And Technical Work

Before making an investment decision, Oswald reminds investors about doing extensive underlying and technical work. This entails without being limited to:

Analyzing the Financial Reports: Analyzing revenue increases, profit margin, and the debt the company holds.

Casting The Business Models: Determine the competitive edge and it’s place in the market.

Valuation: Assessment through price deviations, earnings, or a P/E ratio, price or P/B ratio, and unlike other things valuation.

Not Spreading the Investment Risk Across an Investment Portfolio

In investing and the allocation of funds risk management is an essential concept, but it is also one that many investors do not understand. Most people have a strong tendency to focus on a handful of stocks or a specific sector, and that is the mistake.

The Risks of Over-Concentration

As Oswal puts it, excessive dependence on a few stocks makes one vulnerable to market fluctuations. For example, an over-investment on technology stocks in the late 90s and early 2000s resulted in investors losing enormous amounts of money when the tech bubble burst.

Balanced Diversification Strategy

Different asset classes and sectors should be combined while building a portfolio, according to Motilal Oswal. Applying different methods to achieve diversification minimizes risk and blunts portfolio returns. Important strategies for the diversification include:

Equities and Debt: The inclusion of equities plus bonds or fixed income instruments neutralizes volatility.

Sectoral diversification: Investment allocation in technology, finance, healthcare and other industries.

Geographic diversification: Hedging against regional risks through investment in domestic and foreign markets.

Speculative stocks and chasing short-term market trends

Another frequent blunder made by investors is following stock trends without investigating the fundamentals.

The Dangers of FOMO Investing

In the course of a market boom, investors usually tend to go into sectors that seem to be growing. However, Oswal cautions that attempting to buy popular stocks can sometimes be well timed, but they can often be completely overpriced.

Chasing the trend led to many retail investors losing track of primary business fundamentals causing them to buy into overhyped stocks.

For example during the 2021 IPO boom, many retail investors purchased newly listed companies stocks. A few IPOs did well initially, but many others plummeted with little to no reason paving a way for losses.

Avoiding Trends and Checking the Fundamentals

Oswal suggests remaining with companies that are fundamentally sound instead of chasing short-lived market opportunities. He advocates for the detection of companies who show:

• Steady increase in revenue and profits
• Minimal debt
• Strong market position
• Positive cash flow

High Transaction Costs and Portfolio Overturns

Portfolio churning, the act of buying and selling stocks frequently, is yet another of those activities that diminish returns. Oswal points out that trading too much leads to:

Increased fees and taxes: Every action has a brokerage charge and a short-term capital gains tax.

Less compounding benefits: Frequent withdrawals hinder the compounding process, leading to lower overall profits.

Investment Horizon

Oswal suggests a long-term investment hold, which gives a chance for the investment to grow and compound over time. He recommends to investors to minimize turnover in their portfolio while building it over time.

Lack of Focus on Resources Distribution

Motilal Oswal highlights the need for correct resource allocation. Most other investors pay particular attention to equities and disregard bonds, gold and real estate.

Constructing a Balanced Portfolio

A balanced asset allocation strategy mitigates the risk and bring stability during downturns of the market. Oswal recommends this strategy:

70% for equities: For growth over the long-term.

20% for bonds: To give stability and fixed returns.

10% in Gold or REITs: serves as a means of protection against inflation.

Conclusion

Motilal Oswal confirms what we already know about successful investing: it takes discipline and patience in equal measure and an ability to factor in time. Avoiding emotional trading combined with proper research and diversifying one’s portfolio works wonders.

By concentrating on wealth creation instead of short-term profits, retail investors can do a lot more in the stock markets.

Oswal’s underlying message is simple: trading stocks is like running a marathon, not a sprint. It is only through discipline, methodical research, and patience that retail investors can tap into the real potential of the stock market and achieve desirable returns over a long duration.