So, finally, you opened your trading account and you are ready to start investing in the market. You are all set with the famous story of how Wipro converted Rs.10,000 invested in 1981 into Rs.550 crore in 2017. Actually, it is not just Wipro but there are scores of other companies who have created tremendous wealth over the last few years. Stocks like Britannia, Lupin, Eicher Motors, TTK Prestige, ICIL etc are some of the companies that have created unbelievable wealth over the last 10 years. Understanding wealth creation begins by getting your basics about investing right. That means, you first need to understand the investing mistakes that you need to religiously avoid…
Here are the 12 mistakes of investing that you must avoid if you want to be a successful investor and create wealth for yourself…
- The cardinal blunder in investing is not starting off with a time horizon in mind. It is quite common to see investors buying stock and then becoming a long-term investor when the stock price goes down. Have an approximate idea how long you are willing to wait. It could be 1 year or 3 years or 5 years. Clarity is important.
- Entering the market without a stop loss is another common mistake investors make. You may wonder why an investor needs to put a stop loss. You may not put stop losses the way a trader does but you must be clear about the point when you will terminate your investment position.
- Not doing research on the stock you are buying is another mistake. It is one thing to listen to your broker and the analyst and get their views. You need to understand the stock and its relevance in your portfolio from your own perspective. Remember, investing is not rocket science. You must understand the underlying story.
- Focusing too much on returns is another mistake. You may find this quite contradictory but it is true. As an investor, you really have control over the risk. You do not really have any control over the returns. Whether SBI will be up 100% or 300% from here is not in your control. What you control is how you will deal with either situation. Focus on the risk more than the return of the stock.
- Focusing too much on low prices and low P/E ratio. Remember the old adage, “Cheap crap is crap anyway”. If you had tried to buy stocks like Kingfisher, Deccan Chronicle or Unitech when they became penny stocks you would have still lost money. Stocks normally command low P/E ratios because that is what they are worth. Don’t buy a stock just because the price is low or the P/E appears to be too salivating.
- Overtrading is another common mistake that investor makes. When you overtrade, the commissions and the statutory charges add up to quite a bit. Taxes are another dimension. You need to look at keeping your expenses low. That is how you make returns on your investments. Your focus should be more on identifying and staying with quality stocks.
- Many investors mistake blue chips as great stocks. Remember, not all great companies are great stocks. For example, L&T continues to be an iconic company but it has disappointed shareholders over the last 9 years. You earn alpha on stocks when you get into the stock at the right time. Eicher was a great buy in 2009, but almost fairly priced at current levels.
- Another mistake is not knowing how much risk to take in the market. Whether you are loaded with money or not, you still come into the market with finite capital. That means you need to manage your risk to ensure that you don’t lose more capital than you can afford to lose.
- Averaging your positions is a cardinal sin. You may have made money averaging a stock but there are 2 key risks in averaging a stock. Firstly, you made a decision and it turned out to be wrong. By averaging, you are making the same mistake twice. Secondly, averaging can inordinately skew your ownership of certain sectors and themes and that could impact your overall risk and portfolio performance.
- Don’t put all your eggs in one basket. Yes, you need to diversify; like it or not! We live in uncertain times and it is too much of a risk to bet your bottom dollar on a few ideas. If they go against you then you are left with a gaping hole in your portfolio. The answer to this dilemma is to diversify your risk to the extent possible.
- Trying to time the market is another sin in the market. Remember, nobody, caught the bottom or the top of the market convincingly. You can just look at the value on a relative basis. Timing the market is a zero-sum game. Over a period of time, you will lose more money than you make. Focus on stocks, stories, and value. That will be a better bet!
- Don’t be in a hurry to book profits. This is a strange rule but this is what differentiates the good investor from a great investor. At the end of the day, even the best of investors get 7 out of 10 calls correct. The difference is that when they are right, they hold long enough and when they are wrong they are quick to exit.
So the next time you decide to get into the ring (oops I mean open your online trading account), remember these 12 mistakes that investors commit. You will surely do a better job!