Are you a stockholder or a stocktrader? (Part III)

I think the 5 Myths best captures the fears people have of the stock market. Let's discuss more.
The link to the article is http://www.investopedia.com/articles/02/061902.asp. I've taken the liberty to summarize most of the key points, therefore most of the contents here are from the article posted there. I didn't make my own anymore since they've already captured most of the misconceptions.

Myth # 1 Investing in stocks is just like gambling.

Gambling is a zero-sum game. Investopedia defines zero-sum game as

A situation in which one participant's gains result only from another participant's equivalent losses. The net change in total wealth among participants is zero; the wealth is just shifted from one to another.

The site also highlights this fact, 'it merely takes money from a loser and gives it to a winner. No value is ever created'.

My Take:

People tend to forget what stocks really are. They're not chips you play around in the casino. They're proofs of ownership in a company. And that means, when the company is doing well, and they declare dividends, all stockholders on record are entitled to it. Not only that, if the company is doing well, it's reflected in the stock price, and all stockholders make money (paper gain unless sold) because of the capital gain.

In the local arena, a majority are just stock traders. They want a quick buck, in and out. And it's probably that mentality that gives other people the mindset that the stock market is no different from a gambling house.

Myth # 2 The stock market is an exclusive club in which only brokers and rich people make money.

The advent of the internet has made the market much more open to the public than ever before. All the data and research tools previously available only to brokerages are now there for individuals to use.

Individuals have an advantage over institutional investors because individuals can afford to be long-term oriented. The big money managers are under extreme pressure to get high returns every quarter. Their performance is often so scrutinized that they can't invest in opportunities that take some time to develop. Individuals have the ability to look beyond temporary downturns in favor of a long-term outlook.

My Take:

Nuff said.

Myth # 3 Fallen angels will all go back up, eventually.

Whatever the reason for this myth's appeal, nothing is more destructive to amateur investors than thinking that a stock trading near a 52-week low is a good buy. Think of this in terms of the old Wall Street adage, "Those who try to catch a falling knife only get hurt."

My Take:

There are people who love to chase prices. Newbies tend to want to buy a stock that's fallen from the high, because they think that, "Wow, I'll earn that much!". In short Greed is in play here. You don't buy a stock that's hitting new lows! You buy one that's hitting new highs!

Myth # 4 Stocks that go up must come down.

The laws of physics do not apply in the stock market. There is no gravitational force that pulls stocks back to even. Over ten years ago, Berkshire Hathaway's stock price went from $6,000 to $10,000 per share in a little more than a year. Had you thought that this stock was going to return to its lower initial position, you would have missed out on the subsequent rise to $70,000 per share over the following six years.

We're not trying to tell you that stocks never undergo a correction. The point is that the stock price is a reflection of the company. If you find a great firm run by excellent managers, there is no reason the stock won't keep on going up.

My Take:

There will always be corrections in the market. Unlike first world countries, our economic growth has not been on a consistent trajectory. It's always been a cycle. So it's always good to monitor your holdings from time to time. And more importantly, keeping abreast of local economic news.

Myth # 5 Having just a little knowledge, because it is better than none, is enough to invest in the stock market.

Knowing something is generally better than nothing, but it is crucial in the stock market that individual investors have a clear understanding of what they are doing with their money. It's those investors who really do their homework that succeed.

Don't fret, if you don't have the time to fully understand what to do with your money, then having an advisor is not a bad thing. The cost of investing in something that you do not fully understand far outweighs the cost of using an investment advisor.

My Take:

I have nothing more to add your honor.

In the conclusion of the article, Investopedia had this to say:

"What's obvious is obviously wrong." This means that knowing a little bit will only have you following the crowd like a lemming. Like anything worth anything, successful investing takes hard work and effort. A partially informed investor is about as effective as a partially informed surgeon; he or she will only hurt themselves and those around them.

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I think their article already captures the prevalent misconceptions that people have of the stock market. Investing in the stock market is a tool one can use to effectively diversify his wealth. Putting your money in just one source is good only if the returns are very high (like business), but this is active income. Stock market investing can be a form of passive investing, if you do it the right way.

I will continue with the commentary in my next blog.

Please leave your comments so that I can improve this further :-)