Common mistakes committed in the equity market

Published on Tue, Sep 21, 2010 at 14:33   |  Updated at Tue, Sep 21, 2010 at 14:37  |  Source : Moneycontrol.com

Throughout your investing career, it is likely that you will be guilty of committing a lot of mistakes. There is no one today who has not committed costly financial mistakes including the legendary Warren Buffet. However it is the ability to recognize and learn from your mistakes that will determine whether you are able to achieve your investment objectives. It is thus paramount to commit as few mistakes as possible. Failure is often the best teacher provided you allow yourself to be taught. 

 

The last three months have exposed investors to several such mistakes. Here we highlight eight of the common ones.

1. Relying on tips and hearsay is the first and most common mistake committed by most investors.
2. Expecting Big Gains fast. Very few people have the mindset and patience required to invest in equity. A common expectation is to make big gains quickly. There is no focus on the risk the investment exposes your portfolio to. A classic example of recent times was the Power sector. Any stock that had the name ‘Power’ in it was considered sacrosanct. People did not even care about risk involved in taking exposure to such stocks. Instant gratification is injurious to your wealth.
3. Leverage in equity markets can have disastrous consequences not just on your financial health but on your physical health.
4. It’s not easy to always make money in equities and there could be periods of negative returns. Though over time, returns can even out, in the short run there could be sizeable downside. So don’t be surprised by it. Understand, expect corrections and be realistic.
5. Have reasonable expectations from equity. As an asset class equity should technically deliver returns in line with corporate earnings. However we do not invest in a utopian stock market but a market that drives on hope, greed and fear. Hence you are bound to see eras of excesses and exuberance and those of pessimism.
6. It’s all easy to know ‘Buy low and sell high’, but majority of people would end up doing exactly the opposite. Most investment banks, brokerages, hedge funds, FIIs, domestic investors, gurus and analysts are super confident in a bullish market when highs are torn apart every other day. Things suddenly change for them when the market corrects and no one is ready to put even their thumb in the market. Learn to embrace market sell offs. People who could not earlier invest had an excellent opportunity to invest at 14000 to 15000 levels but I do not know too many people who had the gut to really invest.
7. When the market corrects, do not put all your eggs immediately. Corrections that happen after very sharp rallies tend to extend themselves over a few months. One of the strategies that can be adopted is to invest in a staggered fashion. You should start investing if the market has corrected by more than 15-20% and go higher when it crosses 30-35%. There is no way to know what the bottom could be and I don’t know how people come up with their holy predictions on how lower can the index go. When the going is bad, all one hears is bad news and it’s very important to grow beyond these daily projections. Investing is certainly not a poker game and you would be harming your economic interests by following what a bunch of unknown people are doing.
8. Don’t keep looking at your portfolio because things are not going to change even if you see it many times. A quarterly or semi annual review should be good enough for most people. Looking daily is harmful to your overall thought process and can urge you to take emotional decisions whether on the way up or way down.

 

This is the time to take stock of what you actually have. The first step is to understand the various investments in your portfolio and how they fit within the overall scheme of things.
 
Most people would like to see their investments grow right from day one. For a long term investor, it should not matter if prices do not rise right away. Infact if investment values indeed go down, you should be happy to see your buying happening at lower levels. Eventually when the market recovers, you are bound to get much higher returns because of these inefficiencies in a turbulent market. The only time your stock prices should be up is when you need to sell. 

Currently one sees lower volumes in the market due to fear and several other factors. The increase in STT (securities transaction tax) and short term capital gains tax also has had some impact on volumes. There is a lack of clarity on the direction of the market. However just because this is the case, there is no need to change your investment strategy. Continue to buy in a staggered fashion and just stay put if you already have.