Top seven misunderstandings about the stock market

I have had 100s if not 1000s of conversations with Stock Card users. We always have honest conversations about what they think about the stock market. They share what they are excited about and what intimidates them. While every conversation has its own focus, there are a few well-accepted misunderstandings about the stock market that are the underlying themes of almost all such conversations. These misunderstandings are so wide-spread that many people use them as the reasons to avoid investing in the stock market. In this blog post, we are looking at the top seven misunderstandings about the stock market. All successful investors have found a way to overcome such misunderstandings. Have you? 

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Number 7: Stock Market is rigged against me

Number one misunderstanding about the Stock Market is that the system is rigged against us. I hear this too many times. Especially form the younger people. You know the avocado toast generation ;) I sometimes feel that way too. When you hear about the financial crisis, or Bernie Madoff scamming investors and stealing their money, or you learn about the scams that Wells Fargo pulled off, it's easy to just assume that if you invest in the stock market, there is an evil corporation sitting to rip you off on the other side of the line. But in reality, those are just small portions of the market. The stock market is a marketplace similar to every other one. Just like AirBnb is a marketplace for people's extra bedroom, the Stock Market is a marketplace for the company's shares and other financial products. These markets are not good or bad. How you use them as a user can be good or bad. But, marketplaces are just markets. They are not rigged or do not play favoritism. Especially when it comes to stock market, years of government regulations and scrutiny of the public has forced them to eliminate any bad player or behaviour.

Number 6: Trading is the same as investing

You probably hear your friends talking about how they lost 10,000 dollars in the stock market when they were 22, and they had to move back in with their parents and other such stories. While those stories are true, those are mostly related to people who wanted to trade and not invest. To explain it in the simplest terms, when you trade, you are all about charts and stock prices. And, you try to use whatever you can to predict the future price. Maybe in the next 2 minutes or 30 days. That's just extremely fast-speed, too technical and one might even say delusional. But, there is another way of participating in the market. It's called investing. You don't really care about the prices. You rather focus on the strength of the companies you are investing in. Do you know how venture capitalists invest? They are not investing because the valuation of the company is going to go up in the next 2 hours. They pick a good team, a good product, a company with indicators of success and let the company grow for years before they consider selling. You can participate in the stock market just like you invest in a startup, or in real-estate or your friends' restaurant. You never invest to sell in the next 30 minutes. You are investing because you believe in the company and its long-term potential.

Number 5: Investing is the same as gambling

This one annoys me so much! Because people think investing in the stock market is like playing on the slot machines. You put your money in, and either "ding ding ding" you have dollar bills flying over you, or you lose all of your money, so keep betting. Again, if you are trying to predict the price of a stock in the next 30 min or 30 days, it's sorta similar. But, if you are investing, you are doing it based on facts, information, and you invest slowly. Sure, there are times when the whole stock market goes down. They say, 1 out of 3 years, the stock market falls. But, never does the stock market lose all of its value in one day. According to CNN Money, on "Black Monday" in 1987, the Dow plunged 22.6%, still the biggest one-day percentage drop in history. Even on Black Monday the one-day price-fall was not as much as what most people assume. 

Number 4: You need to be a math wiz or have a PhD to invest in the stock market

There is a misunderstanding between what you need to know if you want to invest and what you need to know in order to work in the financial industry. The easiest way to think about it is like buying a house. Buying a house is an investment. But, you don't go and become an architect or an engineer to buy a house. You use your judgment and you do research and collect information and make an informed decision without having a degree in architecture. The same goes for investing. You don't need to have a degree in finance to be a good investor. Finance degrees are required if you want to build a financial product or work in banks and stock exchanges. But, investing needs common understanding of how the world works, and how the companies make money. You can learn the basics of how you measure the revenues or profits of a company. There are probably 10 financial things you need to know and that's it. After that, the rest is filled with just too much technicality you do not need to be a long-term investor. Also, these days, you can google everything. You don't understand a financial term, just google it. On websites such as Investopedia, or investor.gov, everything you need need to learn is already explained in an easy way.

Number 3: You need to keep up with the news at all time to win in the stock market

This one is a hard one to skip. It's because financial media is just everywhere. Even the non financial media talk about what the companies do. But, you need to remember that the news is not really designed to inform us, but to entertain us. It creates overly positive or too negative halo of what's happening. For example, if a company releases its quarterly earnings, and everything is going well, except that the growth of users is a bit lower than what the analysts expected, the headlines will be "Company X missed the analysts' expectations". It's good for the media, because people show an emotional reaction to such news, rather than to a news that says, everything for company X has been good and nothing really to pay attention to. Maybe for the next few quarters monitor the user growth. Well, no one would click on that topic. So, naturally the headlines are designed to make us show an emotional reaction. There is a very interesting article shared on one of our intelligent investors FB group threads. It is about how CNN reports political news like sports. Which is also true about how financial media reports facts like a drama and celebrity news. You see arguments between the commentators, you see countdowns, and visual clues to make you react emotionally. Clicks fuel the media. So, if you really understand the incentives behind the financial media, you really should step back, shut down those news notifications and not make investment decisions based on those.

Number 2: Someone, somewhere can predict the stock market

With all the advancement in the technology and the talks of artificial intelligence and algorithms, it's easy to believe there is a tool named crystal ball somewhere that can predict the market. But, the reality is such a thing doesn't exist. Look, there are two kinds of systems. This is from George Soros, who is a pretty well-known trader and who has gotten wealthy placing large bets on the world's political speculations. He, by the way, has lost a lot of money too. But, net-net he made more that he lost. Anyways, he says there are systems where the predictions impact the results and those are almost unpredictable. What he means is that, when you predict where the stock price would go, and you act on it, you knowing that and acting on it impacts the direction of the market. So, there is no hidden villain somewhere who knows how the market moves every second, and he or she is making perfect money. The other thing to remember is that all these market prediction algorithms need data to be able to predict the market. The stock market is being impacted by millions of players. We simply don't have the inputs required for the algorithm to work 100% of the times. Maybe sometime later in the future, a new wave of technology comes around that can read the internet and understand every piece of text and document and comments and conversations that is being put out there, and has enough historical data of each element to understand the impact it has on the company's price. Until then, and as far as it concerns us, there is no way to predict the stock price. Someone you know might have gotten lucky 5 times, but sooner or later he/she will flop. Don't believe anyone's claim until you see a reliable stream of results.

Number 1: Individual people should not invest in individual companies

Oh yeah, the mother of all misunderstandings, the source of all confusions! No individual people should invest in individual companies and the best you can do is to invest in an index fund and earn the average of the market. I actually have a story about this. You wanna hear it? I remember I was telling a friend of mine who was and still is a VP of a technology company I was working with. He's a smart guy, with a consulting background, makes investment decisions for the company by allocating money to projects and ideas, etc. But, when I told him that I'm leaving the company to start my own start-up, Stock Card, he replied, well there is a school of thought that says, individual people should not invest in individual companies. There are so many people, so many smart, well-educated people who wholeheartedly believe that they should not invest in individual companies. You see the same smart people make money decisions for their companies, they invest in startups and other projects, but when it comes to the stock market, it is engraved in their brains that they should not touch it.

In reality, look at successful investors, most of them make their own investment decisions. Sure, you have to learn some basics, and learn not to be emotional about investing. But, you can say that about everything. Since, you may overeat and not go to gym for a few weeks, you should never try to be fit. You may get a bad score in an exam, or just not be good at one subject, so you should stop going to school. It just doesn't make sense. Maybe 10 years ago, 20 years ago, everyday people didn't have access to the wealth of free information we have at hand now. Maybe it was hard to aggregate them, maybe it was expensive to order them. But, now, with all the technology we have at hand, using internet and all the tools, we can subscribe for small amount of money, there is no excuse. There is no excuse to say, individual people should not aspire and dare to be great at investing in individual companies.

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That's it! Do you have any of such misunderstandings? Let me us know, either send me a note through any of the following channels and let's have a conversation about it. The sooner you resolve such misunderstandings, the sooner you'll become an intelligent investors. Let's do it!

​Let's wrap up with a few newly published Stock Cards. Have you seen them? Stock market investment inspirations are all around us. You just have to look up their Stock Cards: