This is a guest post from Mr. Amit Doshi. Amit is a Director at Care Portfolio Managers Pvt. Ltd., a Portfolio Management Company, registered with SEBI in India. The views expressed above are his personal views. He can be reached at firstname.lastname@example.org.
Sounds a bit difficult! Or almost an Impossible task?
While you have the option of an “Undo” in your Gmail; there is no such option in life. Completely agreed! But am sure you will agree that there is a possibility to take steps to rectify past mistakes and probably even revive the losses because of such mistakes.
So here’s an attempt made to identify the mistakes, based on my experience with various clients/investors, which every investor has made at some point in time and then corrective steps that should be taken.
MISTAKES which an average investor makes and which one MUST AVOID:
- INVESTMENT or SPECULATION?
Every investor has expectation of earning profits by investing and rightly so; that is what stock markets are meant for! Right? But there is a thin line of difference between this expectation and Greed. I am sure every investor would have invested in some company based on some “tip” received from their broker, investment banker, person having access to ‘insider’ news and would have put in funds with a short term view without doing any proper research.
I would want to classify this as a “Speculation” and not as “Investments”. This falls amongst the most common mistakes and strict No No for such an act. And even if you have succeeded couple of times; consistency is difficult !
- TRACKING INDEX; WHILE INVESTING IN INDIVIDUAL STOCKS
Every investor discusses about where the Nifty/Sensex is or where the Dow Jones / NYSE has reached. There is absolutely nothing wrong in doing that. But what is wrong is taking investment/divestment decisions in a company based on the index movements. What index is representing is mere composition of selected stocks having particular weightage in that sector and not necessarily representing performance over your portfolio. Index governs the sentiments of markets but not of all stocks. If your portfolio comprises of stocks other than those part of index, then tracking of the business of that company and paying more attention to the results of the company would make better sense.
- DWELLING ON LOSS MAKING STOCKS
There are investors whom I have met are merely holding on to a stock, purely because they are into losses and current value is far below their cost. The worst thing is that many investors buy additional shares whose prices are falling to bring down the average cost ! Here it reminds me and I would like to quote:
“There’s no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or, worse, to buy more of it, when the fundamentals are deteriorating. – Peter Lynch”
Here the mistake is taking a Buy / Sell call without checking into the fundamentals of how good/bad the company is doing and taking a call purely on the price movements of the stock.
- DIVERSIFYING PORTFOLIO BEYOND LIMIT
I have seen so many portfolios of investors who have a very long list of their investment holdings. The argument here of having a long list is that, they are diversifying into various businesses and stocks so that the portfolio is protected against the risk of economic downturn or limiting losses of the wrong investment decisions.
Here again, I would want to put a quote
“Usually a long list of securities is not a sign of a brilliant investor, but of one who is unsure of himself. “
– Philip Fisher
This is for all those investors who say that they do not have time to do enough research on any company they want to invest into. Keep your portfolio short and you will suddenly realize that you have time to go through the website of the company or track the results / performance of the company. The moment you do this you will feel a marginal need of diversification.
At this point probably, the readers are thinking that I have been reading this article for “how to recover the losses from stock markets” and so far there are no talks of what is to be done? My thought is majority of time answer to difficult questions are very simple. So the answer is:
- Half the job is done when we realize that we make such mistakes and for the balance, answer is:
- Find out why the companies you have in your portfolio are not performing
- Reshuffle your portfolio; book losses from companies with bleak growth potential and shift that funds to companies with strong growth potential (This needs lots of Guts)
- Avoid the mistakes listed above
- If you do not have any financial background or not finding time to do the activity of evaluation; check with a professional advisor.
- If you believe there is no point in doing either of the above; just exit from stocks. Because it is better not make profits out of the stock markets than incurring any further losses.
Every point mentioned above is somewhere known to the investors, the key is “Implementing”.
All the very best. Happy Investing ! 🙂