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Tuesday, January 4, 2011

Why do retail investors fall prey to the ‘get rich quick’ syndrome?

Most retail investors enter the stock market for the first time near a peak, after hearing about their friends or relatives who became rich overnight by investing in stocks. They think – like many poor souls before them – that getting rich quickly from the stock market is the best idea since sliced bread.

In a country with a large number of educated youth and inadequate employment opportunities, there are enough con-men and charlatans trying to make a quick buck by promising jobs. They usually lure unemployed youth with guaranteed jobs – even overseas jobs - if they can first cough up a sufficiently large amount of money.

One can appreciate and understand why an unemployed person may get tricked by such scams. He has a genuine need of money to sustain himself and his family. But it is really shocking that young people who are not just well-educated but also well-employed falling prey to the ‘get rich quick’ syndrome.

After announcing the re-opening of subscriptions to my Monthly Investment Newsletter in a recent post, I received an email that went something like this:

‘I lost a large sum trading intra-day. I went long in Nifty futures. The spate of scams made the market tank. Booked heavy loss. Then went short in Nifty futures, but the market moved up. Again booked heavy loss. Now my only hope is your investment calls will not only help me to recover my losses but make some profit also.’

I was at a loss as well – for words. He was expecting more than a 150% gain to cover his losses and make some profit. Why did he get into this mess in the first place? He thought making money in the stock market was a piece of cake. In other words, he had fallen prey to the ‘get rich quick’ syndrome.

Any long-term investor will say with confidence that if one buys good blue chip stocks at reasonable prices and holds on for 3 to 5 years, one can easily make 15-20% per annum returns on investment. Those returns adequately cover the risk-free bank interest and the prevailing rate of inflation.

But one should not expect higher returns over the long-term. Higher returns may happen in a particular year. Not over several years. Rome wasn’t built in a day. A portfolio of strong stocks that provide steady returns year after year also takes time and patience to build.

Unfortunately, today’s generation prefers instant noodles, 20-20 cricket, and paying by plastic cards. ‘Patience’, ‘discipline’ and ‘long-term’ are replaced by ‘I want it now’ in the dictionary. No wonder young investors find Tata Steel and Colgate boring, and run after Suzlon and Bartronics in the hope of getting rich quick.

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