Mistakes small investors make in a bull market

2017 was a mega year for stock market investors. As you can read in a previous article The year of the bull-2017 even if you did nothing & just simply remained invested through the year you would have earned about 30%. SENSEX/NIFTY returned ~28% during 2017. This would be one class of investors. Other investors could have lost money, getting lured by bull market, would have dabbled in derivatives without sufficient knowledge, gambled in IPOs for listing gains or invested in penny stocks/small cap on tips through Whatsapp/SMS or brokers. These are typical mistakes small investors make in a bull market.

Many investors treat IPOs like a lottery ticket that offers quick gains on listing day. A total of 38 Mainstream IPOs (other than SME IPOs) came out in 2017. While some stocks like Avenue Supermarts listed at a significant premium, most insurance companies got listed below the issue price. While some IPOs which listed at a discount recovered later as overall markets remained bullish, some like CL Educare, General Insurance Co Re & New India Assurance Co Ltd amongst others are still trading at a significant discount. There have been numerous instances of investors booking losses on listing when stocks have listed at a discount & thereafter the stock has recovered. I personally don’t advise subscribing to IPOs since most of them are overpriced. I believe no promoter will offload stake in his company at a discount to what he himself values the Company at and leave anything for minority investors.

Derivatives are the sirens of the capital markets, tempting investors, trapping them and eventually destroying their wealth. Warren Buffett calls them the weapons of mass wealth destruction. Greed & the promise for fast money is what drive investors towards derivatives.  Small investors drawn by the superlative profits ignore their risk appetite & their ability for margin funding in case the stock falls even marginally. They seem to be oblivious of the fact that it is a leveraged 10-20X play and even a 5-10% fall may wipe out their entire capital. Experts warn small investors against dabbling in derivatives. Small investors must understand the effect of leverage and the risk involved in derivatives before venturing into the segment. Investors who jump in without adequate knowledge pay a heavy price for their ignorance & maybe greed to some extent. I personally advice small investors to stick to cash segment without leveraging as a marginal fall will not matter & as historically seen even in case of a market crash it is a matter of time before markets again recover. You may be stuck with your investments for a time period but in most cases you get back your money.

The low price of penny stocks or small cap stocks leads to the misconception that these scripts will rise more than blue-chip stocks that cost more. While some of these stocks had a good run in 2017, many of them have fallen badly. Stock tips that you get on your phone or from your broker mostly come in these penny & small cap stocks. As these are illiquid & easy to manipulate these are a favorite for market operators who drive the stock. I have already come across instances of a hype being created by some specific stock (news about doubling tripling etc) & once invested the stock crashing 50% in a matter of weeks with lots of small investors stranded. Going ahead, when this bull party ends there will be no buyers for these stocks. Lot of these stocks won’t even survive following bear market when market corrects. These stocks don’t offer an easy exit as volumes dry out in a falling market & there may be no buyers for days together.

I had written an article previously. Common mistakes investors make in equity investment

The current bull market is attracting a lot of first time small investors. To survive in the long run they must remove the misconception that stock markets are a gambling den & a short cut to earning fast money. To make money you must be disciplined & patient with your investments. There will be a lot of noise typical of a bull market which you need to cut out. Buy & hold your favorite stocks & you are sure to make money.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

Leave a Reply

Your email address will not be published. Required fields are marked *