It is not uncommon for you to lose money in the stock market. You could be committing one of these mistakes of equity investing. You will consider it a failure and vouch never to invest in stocks again. But hey, did you take time to analyze why you failed? If you did that and still want to be away from direct equity, then OK. It becomes a personal choice and we don’t comment on it. But if you didn’t, then read on.
Right from professional stock investors to amateur first timers every one makes mistakes. Show me a person who has not done a mistake and I will show you a liar. It is your responsibility to learn from your mistakes when you intend to stay long in market . If you fail to learn then you don’t deserve the riches.
Common Investing mistakes in stock market
As many say life and stock market are similar. ‘The exam comes first; lessons later’. Be attentive, hungry and smart. Then you can learn from other’s mistakes. Remember the mistakes discussed are related to investing and not trading. The common mistakes done by investors in stock market are:
Investing Mistake #1 -Waiting for the absolute bottom to buy and absolute top to sell
The common mistake done by even seasoned investors. Greed is a part of human mentality. They want zero loss and maximum profit. This makes the decision making difficult and prompt to wait for the best price. Of course, many don’t succeed catching the absolute best price and those who do are purely lucky.
In the long term, markets are driven by fundamentals. Market prices are determined by momentum in short term. You can predict them to an extent but cannot be exact every time. Learn to practice the art of selling/buying stocks at prices you determine earlier. You can do that either by technical analysis for short term or fundamental analysis for long term investments.
How to avoid this? – Have you heard of system orders. System orders similar to your normal buy or sell orders. Just place an order with required action, quantity, price and the system automatically completes the task. This way you can eliminate the emotional swings which affect rationality.
For example, you want to buy Reliance @ Rs 1000. Your target price is achieved at 2PM but the market is still falling. The price is Rs.995 but still you don’t buy. You swear to buy @ Rs 990 but you will see that the price comes until Rs992.40 and reverses. It keeps climbing and closes the day @ Rs 1012.8. Can you pre-determine the lowest price would be Rs 992.4 ? Sometimes you’ll be lucky and sometimes you won’t.
Be disciplined; make decisions based on your calculations and stick with them.
Forbes article: Common investor mistakes
Investing Mistake # 2 – Booking profits and cutting losses as investors
I bought Page Industries for my client@ Rs 740 few years back. It was always trading at premium valuation. In March or April 2014 it went to Rs.5500 and traded at 54 PE. I thought this was costly and sold the stocks thinking to buy later. Guess what? It went to Rs.6300 and has never fallen below Rs.5500 till now.(P.S: I bought them back around Rs.5800)
The concept of booking profits and cutting losses often don’t apply unless you’re a short term trader. Why would you want to sell a good stock that is rising? When should you sell a stock? Well, that can be a separate post by itself. To make it short, one must not sell an investing stock unless the underlying long term fundamentals changes. Ask if
- Your company management is making wrong capital allocations
- Are they ignoring customers and losing market share
- Have their technology become obsolete and outdated
- Non-transparent corporate governance of new management
- Overvalued beyond rationality (ex.,Infosys was quoting at 105 PE around year 2001 and many dot-coms at 250 times PE)
Unless for above reasons, there is no need to sell your stock if you’re true long term investor. Your aim is to hold for long term appreciation or dividends. A 5-10% rise/fall in prices is nothing in the long run.
As Charlie Munger( Warren Buffett’s partner) said “If you’re not ready to see a temporary 50% decline in your stock value, you don’t deserve to be in the stock market”. If you did proper analysis before buying, don’t be disturbed by short term fluctuations. Let your profits run and be prepared to face nominal paper losses.
Investing Mistake #3 – Buying more of losers – Sunk Cost fallacy with Price Averaging
This is another common mistake investors make due to emotional reasons. The reason – sunk cost fallacy. How many times have you bought a stock then see it go down in value and you bought more. You think you’re averaging the cost price. This is called Price Averaging. Also known as Rupee/Dollar Cost Averaging. This strategy makes absolute sense only for high quality stocks and you’re patient in long term.
But if the stock you bought is not of good quality there is no use in buying more of it. If you do, it is money washed down the drain. Before you buy more of any falling stock, as yourself these questions
- Am I comfortable to hold this stock for 5 years from now
- Is this a really good high quality company
- Did I buy this stock as an investment or trade? Don’t buy more if answer is ‘trade’
- Am I willing to double my investment in this stock? Is it worth the money?
Rakesh Jhunjunwala in an interview said he never buys stocks with prices in a downtrend. Even for successful companies, he averages only when prices go up. Never throw good money after bad decisions. Just deal with or accept it and move on.
Related Post: 5 best equity mutual funds in India
More to be continued in next part of series …Why Investors fail in Stock Market – Common mistakes in Equity Investing-Part2
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