5 mistakes Investor make!

When it comes to investing it is always about knowing what one must not do rather than what one must do. If asked in terms of percentage what to do merely holds 20% weightage while what not to do holds 80%. So, it has become of utmost importance as an investor not to commit any mistakes when it comes to investing.

By nature, humans are very greedy as well as fearful, and this greed and fear factor always influence their investment decision. So, when it comes to investing it is more and more about your emotional quotient as an investor rather than the intelligence quotient. Investors with strong behavioural traits, who have good control of their emotions have a tendency to make much more money from investing than investors with weak behaviour though those investors will have high intelligence, their know-how about the products will be top-notch but still, they will not be able to make a good amount of money from their investments.

It all lies in your behaviour, your behaviour with money. It is important to commit a lesser number of mistakes while investing and these mistakes occur especially because of your behaviour towards money. In order to commit a lesser number of mistakes you should be knowing these five common mistakes investors make so that you can prevent committing the same mistakes.

Investors always chase fads and fancies

The biggest example of investors chasing fads and fancies was seen in the way investors were investing in cryptos or any growth/ momentum stocks. The price of cryptos especially Bitcoin, the price went up to $62,400 on 12th November 2021 from $ 6198 on 20th March 2020. In a small span of time which is less than 24 months Bitcoin had grown 10 times. Many investors participated in this insane rally of Bitcoin. In 2021, 20 million Indians had invested in all cryptos put together. That’s a huge number. The party got over when Bitcoin came crashing down to $ 16, 837 on 23rd December 2022.

Not only in Cryptos but the same behavior could be seen in stocks and equities too. Chasing the growth/momentum stocks which are not in line with businesses and their intrinsic value. Such stocks come gushingly down and as an investor, we fail to book profit or there is not enough liquidity to sell the stock in the market. Stocks like Sadhna Broadcast and Sharpline Broadcast became victims of the pump-and-dump scheme and many investors lost money. The share price of Sadhna Broadcast went from ₹ 2.40 on 13th April 2022 to ₹ 33.15 on 12th August 2022 in a span of four months and Sharpline Broadcast went from ₹ 8.49 on 13th April 2022 to ₹ 50.80 on 10th June 2022 in the span of just two months. Currently Sadhna Broadcast is trading at ₹ 4.99 and Sharpline is trading at ₹ 6.99 per share. The same happened in the case of Tata Metaliks the share price went from ₹ 514.75 on 30th October 2020 to ₹ 1320.95 on 23rd July 2021 now currently trading at ₹ 760 per share. As an investor, it is difficult to know when the party is over.

Speculating in the name of Investing

Investing in a business and buying a stock that will go up has a huge difference on the basis of perception as an investor. Whenever we are buying a share or equity, we have to understand that we are buying or investing in a business.

“Investment is most intelligent when it is most business-like.” Benjamin Graham, The Intelligent Investor

The investors are not able to make the sheer difference between the two. They don’t understand when they are speculating and when they are investing. Once the stock they invested with a view of holding for a longer period of time suddenly skyrockets, they forget the whole purpose of buying the stock and will immediately book profit. Also, on the other hand, if the stock which they bought for speculation or day trading crashes it will become part of their portfolio. As Investors do not like to book losses. If one has invested in a good, fundamentally strong company, one has to stay invested for a long and not worry about the price movement.

Fear of Missing Out ( FOMO )

Investor generally seeks to invest where their close groups of friends, social circle or even colleagues from their professional network have invested. The fear or anxiety of losing out that particular stock or any mutual fund scheme where they have invested or else you will leave out. This sheer feeling of being left out, makes you invest in stock or any mutual fund scheme where you must have not done enough research or where you know very little about it. You just go with the flow and invest. So now you become a part of the group, you belong there and if anything goes wrong you have others to blame. One has to come out of this mindset that what is right for one cannot be right for all. One has to do enough research before investing and focus on yourself and your goals.

Investing on the basis of past performance

This is a general tendency which can be found among investors. The first and basic research one does is to see how the stock or mutual fund scheme has performed in the past, especially in the past year. Once you see the stock price movement or the performance of any mutual fund scheme it gets just stuck into your mind and everything else then just becomes mere formality in the name of research. Hence, while investing we have to do forward calculation on the basis of past performance and research on various parameters. In equity, there is sector rotation which keeps on happening every year and there are very few chances of the same sector performing for two consecutive years. Hence past returns can be deceptive. Also because of this many mutual funds scheme also goes through the same. The reason is pretty simple, any fund manager who has high weightage on any particular sector and that sector outperform that particular year, returns will be pretty high and this will be misleading while selecting a fund.

“Do not take yearly returns too seriously. Instead, focus on four- or five-year averages” - Warren Buffett

Being Impatient

A lot of investors old and new, have a tendency not to look beyond a certain point. They are always looking for small profits. Whenever there is a big price movement which happens in a particular stock, they get restless and try to book the profit for fear of the price going down again. They are just impatient. They cannot see the stock which they bought at an all-time high, they immediately sell the stock and book profit. The BIG money lies in being patient with your investment and thinking for the long term. Being impatient doesn’t really help. One has to buy stock or invest in that business for not less than a decade in mind, one has to keep on doing up-side averaging till the time fundamentals of the company are good. Selling has to be done once the fundamentals of the company you invested in deteriorate or when you need to do re-balancing in your portfolio. Being patient and disciplined is the key to investing in success.

“It is good to learn from your mistakes. It’s better to learn from someone else’s mistake”. – Warren Buffett

If you lose 10% in market value, does a 10% gain bring back the same price, the answer is no. If calculated in terms of percentage, if one incurs a loss of 10% one has to earn 11% returns to restore back the same value again. If the losses are higher ie 20% loss will have to gain 25% profit to gain the same value and if losses are 50%, 100% profit gain has to happen to restore the same value.

As seen from the above chart, it is important to understand and commit lesser mistakes and avoid making losses because the money has to grow at a superior rate in order to restore the same value. So, in order to become a successful investor, it is important to be on the right track and a single degree of deviation can have a cascading effect on one’s wealth.

Investing is simple but not easy!