Converting a fall into a loss

History has shown that retail investors more often buy high sell low whether it be equity or F&O. Some lessons are never learned. Why is it that retail investors—often called backbone of the stock market buy high & sell low thus eroding their capital in the process?

Despite knowing about rule of compounding—they seldom follow it. What does the rule of compounding say? 

The first rule of compounding is: - never permanently put your capital at risk, and if you avoid a permanent loss, time and reasonable return expectations will do the work. The key word here is “permanent” It is the difference between a fall and loss. My most fervently held belief in investing, built on decades of firsthand experience, is that the market itself never permanently takes money from diversified long-term investors. Every fall, even if it felt like the end of the world at the time, has reversed. Not just that, it has reversed a lot more quickly than it appeared possible during the fall. Permanent losses, those that never get paid back, are always manufactured by the investor’s own actions. And they are always manufactured by panic, not by the losses.

If the market falls 10 per cent this month, and the number on your portfolio valuation sheet is red and has a minus in front of it, you haven’t lost anything in any meaningful sense. That number will become the reality, and you will convert the fall into a loss only if you decide to do something about it

In my experience with investor behavior, this conversion of a fall into a loss happens for only two reasons. One, you have no conviction in your investments: you have no idea what they are actually worth, and why you bought them, so you panic and sell. Two, you borrowed and overcommitted during the green phase, so when the red phase arrives, you have no choice but to sell at the worst possible time. In either case, the losses were not created by the market but by your response

I have never come across someone whose whole portfolio became trash because they failed to react in time. The ruin was always caused by the opposite behavior: people sold everything in March 2008 or April 2020, then held cash while the recovery came and went, and they made it permanent with their own actions.

During a serious market fall, the most valuable thing you can do is nothing, and the second most valuable thing is to carry on with your regular investments because, one day soon, you will be thankful for buying the shares and units when they were really, really cheap. To be able to do so, you will have to have belief in your/or your advisor’s convictions, in why you invested, but that’s another story