Investors who have entered the market in last 10 years have seen it ralling up only. Inspite of the fact that the market has been hitting new highs periodically, investor’s portfolio have lost its value and thus many of the investors have not earned at all. When I meet clients, I observe that they are not buying businesses with a long-term visibility. Remember, your behavior in the market plays a crucial role. It is good to learn from your mistakes but it is better to learn from other’s mistakes. After an insightful discussion with many investors, I found the following mistakes people do in general:
- Investors always enter into equity market having high level of expectations with minimum time horizon. High expectation is an obvious reason but minimum time horizon makes it questionable. Isn’t it? When people invest in equities they have some high expectation – say 20% to 25% CAGR or double in one year, or something just as absurd.
Yes, some of us have enjoyed this kind of returns in the past, but we have perhaps been lucky. You expecting less do not mean you will not get higher returns. Keep your expectations far more realistic at 15% to 16% CAGR in long-run. Suppose, if your earn 7.5% in FD, expect to earn about 12% to 14% over a long period of time, after paying tax. It can do magic to your portfolio over long period of time.
Long term means really long term – say 10 years and more. Sometimes you may lose your patience after 5 years so be very clear for goals that are 10 years away. Equity is always a good investment.
“In short run, the market is a voting machine, but in a long run it is a weighing machine” – Benjamin Graham
- Many investors enter into the market when market turns green and exit when it turns red. When they feel their neighbor / friend / relative is earning good from the market or when they listen to an aunt\uncle suggesting them a good buy, they may end up with bad stocks in their portfolio. This is the main reason of not making money in the market.
Shifting from appreciating assets to depreciating assets is also one of the biggest mistakes leading to erosion of the net worth in long term for an investor. For example; by selling shares or mutual fund units one buys a luxury car or any other asset which is depreciating in nature. One should always focus on SIP and not EMIs.
“Be fearful when others are greedy and greedy when others are fearful” – Warren Buffett
- Investors always try to time the market. Investors always tend to average when prices go down (mess companies) and sell when price go up (good companies). They constantly churn their portfolio and chase the returns even in mutual funds . Reason being high payoff. But, they forget the probability of being right which is extremely low. Before investing in any stock\fund one should refer its track record, fundamentals, management ability and fund manager’s performance during the bull and bear cycle. Once you are invested never churn the fund unless and until something goes wrong. People have tons of regret when they sell shares too early or too fast. Buying and selling is fantastic way to make money but for your brokers, not for you.
“The Stock market is a device for transferring money from the impatient to the patient” – Warren Buffett
- The time value of money is the most important thing one has to look while saving and investing. Many investors start planning for their retirement at the age of 50. How is it possible at the age of 50? Either one needs to have huge amount of capital or else he will exhaust his capital very soon post retirement due to shorter time duration between current age and the retirement age. The best way to tap into it is to start investing early with minuscule amount. As early as possible! Never ignore power of compounding.
“Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t… pay it.” – Albert Einstein
- Investors put all eggs in one basket which is very risky. It’s better to diversify the portfolio across different investment avenues depending upon your risk appetite. Evaluate each option very well. But, do not over diversify. Many investors hold many mutual funds in same category like 10 ELSS fund or large cap funds or others. Recently, I met an investor who was holding shares of more than 150 company in his portfolio having around Rs.10,00,000. It means they own the whole market. When you own the whole market, it’s very difficult to beat the index. One should know how to segregate wheat from chaff.
“Diversification may preserve wealth, but concentration builds wealth – Warren Buffett
- Many investors have complicated plans of investment. Simpler plans are far superior. When you fall for a complex plans, you might get intimidated and you may give up after some time. There’s nothing more important than knowing the simple fact ‘why’ and ‘how’ to invest.
“Simplicity has a way of improving performance by enabling us to better understand what we are doing” – Charlie Munger
- Investor without having knowledge jump into unknown spaces.Never buy anything that you don’t know at all or difficult to digest. We know that equity investment is good in long run. But, one should have a good portfolio. Use your time productively and review your investment philosophy and process. Write down why you bought the business\ mutual fund in the first place. Remember, you are not buying a stock; you are buying part ownership in a business. You will do well if business does well.
“Risk comes from not knowing what you’re doing” – Warren Buffett
- Not having any equity or not having enough equity is a huge regret for many. Though It’s not a key concern of their regular lifestyle they are not happy with corpus they have. They think that they are unlucky as they didn’t buy equity in their portfolio of investment. Everyone should have at least a little bit of equity. Never be too much conservative and understand that there is a risk of inflation while investing.
- Many value investors tend to buy cheap valuation stocks by running different queries in free screeners available in market like; P/E < 8 or PB < 2 or D/E < 1 and so forth. Leading them to miss on few good stocks though expensive. Despite these stocks trading at high valuations they keep growing like anything. Of course the valuation parameters are required but they not everything. Investment is not only science but it’s a combination of art and science.
“Price is what you pay; value is what you get. Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down” – Warren Buffett
- Last but not the least is to remember that Income – Expenses = Savings. We need to change this a bit. Income – Saving = Expenses. It means you pay your self first. You pay for your retirement, your child education, your child wedding, your medical safety, etc. and the money that is left can be used for current. Also one should try to delay instant gratification. Focus on paying for all your goals first.
“Don’t Save what is left after Spending, but spend what is left after saving” – Warren Buffett
Investing isn’t simple. But by staying alert and avoiding common investing mistakes, you increase your potential for long-term investment growth. These are some mistakes that an investor should avoid while investing. Most important is to recognize the mistakes and monitor them and improve it.
Cheers and Happy Investing Through CONCEPT.
BUSINESS DEVELOPMENT MANAGER