The advent of online trading platforms has eased investing in shares for everyone. This ease is encouraging many investors to take a DIY (Do-It-Yourself) approach rather than depending on financial advisors/brokers/dealers for advice. However, the lack of understanding about capital markets leads many to take wrong investment decisions. Here are some of the common mistakes that many investors often make.
Looking for low value share prices/penny stocks
I have often seen that people associate a lower price of a share to lower valuation/cheaper. For example they feel a share valued at Rs.10/share is cheaper than a share priced at Rs.100/share. Buying shares is distinctively different from buying products from the local market. What needs to be seen is the relative valuation of the company in relation to its earnings, face value of shares and number of shares outstanding in addition to growth potential of the stock for the investment made. For example if you invest Rs.10,000 in a stock valued at Rs.1000/share you will get 10 shares & if the share is priced at Rs.10/sh you get 1000 shares. Now if the Rs.10 share goes up to Rs.15/sh or the Rs.1000 goes up to Rs.1500/sh you make Rs.5000 profit or 50% returns on your investment irrespective of which share you had bought. Thus percentage returns on your investment is what matters rather than the prices of one share.
Over-expectation from equity investments
Most investors start with unrealistic expectations from equity mutual funds, especially during bull markets. However, returns generated during bull market are not sustainable in the long term. This leads many to sell their shares at a loss during market corrections or bearish market phases a time when they should actually buy more shares.Investors should follow a proper asset allocation strategy as per their needs. As equity investments are susceptible to market volatility, invest in shares only if your investment goals are 5 years away or more.
Not diversifying enough
Many investors, especially first time investors invest their entire money in just one or two stocks. However, instead of putting all eggs in one basket, you need to diversify their investments across atleast 10-15 stocks.Thus, even if a particular stock underperforms, your investments in other stocks may save the day for you by providing higher returns. One way of building up a portfolio for new investors would be to initially invest in equity mutual funds through a SIP & once you have accumulated a decent sum of money you can liquidate it to build up your own portfolio of 10-15 stocks.
Greed is bad, Investors should invest in cash and restrict their exposure to what they have rather than leverage their position by taking multiple times exposure. If with a capital of Rs.100, you manage to buy shares worth Rs.1000, in a bull market you may make a killing, but when markets reverse you will be killed. God forbid, even if the stock is down 10% your entire capital will be wiped out. Without leveraging, even if a stock were to fall 30%, you will still get an opportunity to bounce back and make up your losses over a period of time.
Patience & Discipline is key
Investors are generally focused on short term trading and short term gains and not having the patience of value investing. We must remember that neither Warren Buffet nor Rakesh Jhunjhunwala become what they are overnight through short term trades. Patience and disciplined investing is the key to stock market success.The basic rule of making money is to BUY LOW- SELL HIGH, but retail investors seem to be doing just the opposite. Instead of adopting a ‘trend is your friend’ approach,, investors would be better of adopting a contrarian approach in buying when the markets fall and wait patiently for the markets to recover. In the words of Warren Buffet- “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”.Investors must invest with conviction, the shares they buy, have the mental strength to tide over short term losses before things turn around. Remember, a share is actually a “share of ownership” of a company, and one should tread it that way, invest as if you are investing in your own business and make it grow over time forgetting the short term ups and down that any business may have.
Just as there are no short cuts in life, there are no short cuts to making money in stock markets.No matter what happens markets will always give you a second chance to recover your money even if you go wrong once, so just be disciplined, be patient and donot panic with your investments & respect the markets. HAPPY INVESTING!!!