Many lose money in stock market. At Smartmoneygoal , we started a stock market investing series for beginners as part of investor education initiative. This post is continuation of ‘Why you fail in stock market -Common mistakes in investing –Part1’. To read the first part click here. Let us continue with it.Read on….
Common Stock Investing mistakes
4) Investing mistake #4 – Following hot tips or a TV guru
There is too much information about the markets. Really? Can there be anything like too much information? If there is, isn’t it good and useful? There are lots of TV channels and newspapers around. You get information the next minute and the stock price ticks every minute. This creates a sense of urgency and forces to commit an emotional decision. Too much information is not necessarily good information.
The so called gurus give you a hot tip every day as the next multibagger. Have you ever thought ‘If there were so many good stocks around, shouldn’t every one be rich?’. How many gurus talk about their losers? They always highlight their successful stocks and don’t talk about their losers. Why? Their livelihood depends on it. Will you listen to a person who lost money? Yes, you can follow an investment guru but do your own analysis. Remember, you can listen to them but the decision must be yours. As Buffett said “Wall Street makes its money on activity, you make your money on inactivity”. Here is how to avoid these mistakes
- Switch off the TV. Don’t keep watching it all day. Only traders need to do that.
- Listen to gurus. But think rationally and decide yourself.
- When there is a seller who thinks a stock is bad, there is a buyer who thinks it is good. One of them is always wrong.
- Don’t trade too much. You’ll lose a lot as brokerage fees.
Related Forbes article: Common Investor mistakes
5) Investing mistake #5 – Inadequate research about the stocks you invest in
The most important reason you’ll lose money in stocks. One can’t stress enough the research one needs to do before buying a stock. If you don’t have the time or knowledge to do the research, then buy mutual funds and let them do the work. If you don’t do proper research, then all you’ll have is a bunch of crappy stocks.
When you buy low quality stocks, you risk your capital to permanent loss. On the other hand, when you purchase a good stock after doing proper analysis you can rest in peace. You’ll know that the price fall is only temporary and not permanent. The confidence you get from holding stocks which you bought after research helps you maintain rationality in times of distress and turmoil. So how to find/research about a stock? Check for
- Companies with good moat and brand advantage
- Companies with durable competitive advantage
- Valuations below historic average of earning multiple
- Efficient and transparent management
Definite read: Tips to choose good quality stocks for long term investments
6) Investing mistake #6- The price of falling stock can’t go down any further
The price of a stock falls either due to deteriorating fundamentals or market momentum. If it is due to market momentum, the price will eventually be recovered after certain period. It can be the next day or next few years based on when market recovers. But when a stock falls due to deteriorating fundamental, it hardly recovers unless the fundamentals improve.
Many stocks get converted to penny stocks due to changing fundamentals. And they stay there forever. An investor who decides to buy just because a stock has fallen by so much will be in for a rude shock. There is absolutely no bottom or top when a stock is in strong momentum. It will defy all logic and sense for certain time.
IVRCL was trading @ Rs246 in 2008. It came down to Rs.93 in 2010. I expected the economy to rebound in few years and so advised a friend who valued my opinion to buy few shares @ RS 80. I told him it’s a high risk-high gain bet. Did you know what happened?. It kept falling and falling till Rs.59. I asked him to book losses a month later @67 when stock rebounded. The stock price fell again and traded near to single digits sometime in Jan 2014. It’s only beginning to recover now as economic cycle rebounds for real.
P.S: I stopped giving free advice on price range of stocks after this J We are not so enthusiastic in discussing losses as we do with the profits. They also keep quiet when stock falls and we also get busy bothering our own work. Nowadays when people look up to me for free advice , I merely point out the good stocks with reason. This, they can decide themselves if they apply little common sense. You need nobody’s super brain to decide if people will be brushing teeth (Colgate) or drinking Horlicks(GSK Consumer) 10 years from now.
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7) Investing mistake #7 – Inadequate diversification
Diversification is absolutely important for investors who are not professional investors. Not just diversification among different assets but within same assets. For eg., its not just enough to buy bonds, stocks, real estate and gold. Even within stocks you need to hold at least 10-15 stocks minimum. If not, one bad decision will affect your returns significantly.
Many investors just hold 3-5 stocks in their stock portfolio. So if there is 50% fall in one stock it affects total stock returns by 5-10%. Unless you’re a professional investor and know what you do, it is good to hold diversified stocks from various industries. Yes, some people will be successful with just 4-5 stocks but they would have done deep analysis which most investors fail to do.
Related read: Top investor mistakes from fool.com
8) Investing mistake #8 – Not being aware of changes in stock fundamentals
As an investor, you need to be aware of news related to your stock holdings. Wait! But doesn’t this contradict mistake# 4. Not really. We advise you not to follow on hourly basis. However you’ll be foolish not to be informed. How many investors lost money in Satyam Computers and Financial Technologies. These were highly trusted companies until the news broke out which wiped out billions of investor’s wealth.
Well, you can’t avoid the initial day losses. But staying informed will help prevent total capital loss. If you had enough diversification, then even 30% loss in a day will make less than 3% losses considering overall portfolio value. Another important reason to diversify if you’re an ordinary investor. One should divest fully or at least partially when the fundamentals of a stock changes. You’ll always get a chance to buy it back later if conditions improve again.
These are the most common investing mistakes in stock market.Hope you liked the article. Help us by Sharing the post if you like them.
Do you have any experience like above mistakes? Let us know with your comments below..