With the recent trend of stock investing and Digital awareness towards the wealth generation using equities has recently become popular. One has to understand the potential risks involved in investing in stocks. Let's discuss 5 mistakes that you may have made or will make if you are casual about it.
1) Investing without Research
Depending on Tips
The majority of the investors are driven by tips from so-called "Khabris" who claim to have an insider tip of some company. The decisions driven by such tips are nothing new. You have been doing and might continue if you don't have a habit of researching. Mark this thing, "If you know anything, then everyone knows this." There are two parts of this insider tip:
Market manipulation: The company wants you to know the tip and act upon. They drive their stock prices accordingly and book profits over the market sentiment and you end up losing money.
The tip is true: The tip you have is true but the market has already accommodated the forthcoming scenario. For that research before you put in your money.
The best example of how people are emotionally Driven! A fun one, Do watch...
TV and Economic Gurus
Yes! They know a lot, understand the market and provide suggestions, be it CNBC Awaaz, ET times or Money control. But understand one thing, they address the audience in general. The advice is neither dependent on your portfolio size, your portfolio diversity, your risk appetite nor your Emotional Quotient. Listen to all of them, gather notes and then do your homework! A successful investor spends an hour or more daily to understand the market and prepare a strategy!
2) Investing in just penny stocks
I get the idea from where the urge to invest in penny stocks comes from! Every beginner has a very low starting capital, maybe ₹ 10k - ₹ 50k. As the Indian mentality goes, "Kam me zyada", we believe in the number of stocks we hold in a portfolio than the quality of stocks. It doesn't matter how expensive a blue-chip stock is, the returns is not per-stock-basis but percentage-growth-basis. To give perspective, let's talk about two popular brands five years ago in 2016,
No doubt, how much IDEA was popular back then and had great prospects, it would have been a favourite choice for anyone for its price. And today we know where it stands!
MRF was the costliest then and it's costliest even now! But look at its return in 5 years, around 100%
3) Booking profits at 2x or 100%
The very idea of securing the base capital of your investment when your portfolio reflects 2x or 100% returns, is one of the greatest cheating to the compounding rule. The thought of 100% return as free corpus after booking of the investment is hollow in itself. Yes, there's a chance of falling markets ahead or even emerging markets but in the long run, capital can grow 3x-7x(300%-700%). To give a perspective, let's take an example of Reliance Shares bought for the capital of ₹10,000!
Let's calculate on the capital earned when profits were booked on 2x returns! We will invest these profits booked into FDs with 7% p.a. interest rate(Risk-free option?).
Capital of ₹ 10,017 in June 2020 with 2x profit booking and investing the profit into FDs =
₹ 27851 (value of FD booked in May, 2005 for ₹ 9776) +
₹ 25723 (value of FD booked in April, 2006 for ₹ 9682) +
₹ 24975 (value of FD booked in May, 2007 for ₹ 10080) +
₹ 12279 (value of FD booked in May, 2017 for ₹ 9960) +
₹ 9960 (Profit booked in June, 2020) + ₹9960 ( Value of 6 Units in portfolio) = ₹ 110748
% growth = 10x
Capital value when left untouched and let compounding do its magic = ₹ 313740 (Value of 189 units in portfolio)
% growth = 31x
4) Never take a loan for stocks
Never ever take a loan to invest in the stock market. Given how volatile and uncertain the market is and how good is your portfolio to tackle the uncertainty, don't invest by taking a loan! Even if you are a God in investing... NEVER EVER!
5) Panic Selling
True! We are emotional beings. At times, sentiments drive our decisions and panic selling is the by-product! No one likes to see their portfolio go in negative, but here "Patience is the virtue". The best option in times of crisis is not to sell but to buy more. Buy more shares of the company that are least affected in your portfolio. The one that shines in the storm will conquer the world when it's sunny. When the market returns to a bull run. These crisis-led investments become your multi-bagger tomorrow! The whole idea of pumping more money in times of crisis is averaging the portfolio loss. When you can't pump in just wait unless you want to sell them in urgent needs of liquidity.
Conclusion
We learn a lot as we go forward. We should diversify the portfolio and have a habit of investment. As Ramesh Damani and Rakesh Jhunhjunwala have iterated, "Understand the difference between trading and investing, we trade to make money, we invest to grow the money". Trade if you like, but the investment is the true root to the leaves of wealth creation. Till then happy investing.
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