InvestorQ : Why creating wealth definitely take time and effort, while loss takes only a few days in the Equity market?
Diya Chitale made post

Why creating wealth definitely take time and effort, while loss takes only a few days in the Equity market?

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Aastha Awasthi answered.
6 months ago
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Positive returns are not always a slow and arduous process. Creating wealth definitely takes time and effort, at least the initial phase. However, making a substantial profit need not a slow process. Having said that, I do understand the crux of your question and I think it all comes down to psychology. This can be largely attributed to the “loss aversion bias” that is entrenched in human psychology.

Loss aversion bias is a theory coined by famous behavioral economists Daniel Kahneman and Amos Tversky in 1979. The meaning of this concept is encapsulated in the expression “losses loom larger than gains”. It is thought that the pain of losing is psychologically about twice as powerful as the pleasure of gaining. People are more willing to take risks to avoid a loss than to make it again.

Stocks are inherently volatile and risky. If we take a recent example, during the initial stages of the pandemic when lockdowns were being announced across countries, the global stock markets spiraled feverishly. Investors were spooked and added to the decimation of market value by furiously selling shares. However, in all this, there were certain investors who were doing the opposite. They were buying shares as the markets were correcting. This is possible only with extreme self-discipline and absolute confidence in one’s research. And being contrarian at a time when the markets were self-destructing paid off handsomely in retrospect. 

Inequity markets, more often than not, losses happen because people can’t bear to take short-term volatility. Herd mentality is very much prevalent in the stock markets. And when things start getting a little rough, very few investors have the self-discipline and patience to dig their heels in rather than follow the herd.   As Warren Buffet famously said, “ The stock market is a device for transferring money from the patient to the impatient.”


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