To answer that question we just need to figure out what the good
investors do, that we don't.Those who make the biggest money in stocks
come out with superior long term results because they make fewer
mistakes than us and not because they have any miraculous ability to
keep finding the right stocks all the time.Mere mortals like me and you
are fooled into making way too many mistakes in the stock market and end
up disillusioned and with much less money left than what we started
with.So it all boils down to the fact that the person making fewer
mistakes while investing will end up richer.
So how do we remedy this? What are the common pitfalls that we keep repeating over and over again that good investors avoid? There are four broad categories of mistakes
1) Mistakes in Asset Allocation - We buy stocks when the markets are booming and start selling them when the markets start crashing.Its like buying a car when the car price is near its peak and selling it when the prices are most depressed.Any high school kid will tell you that its stupid to buy something at a very high price and then sell it at a very low price.You almost always will end up losing money.Yet we fall into this trap time and again.Consider the current market scenario and you will realize how true this is.Almost everybody is scared to buy stocks now when they are cheap and wants to invest in FDs and bonds.Compare this to September last year,when every tom,dick and harry wanted to own a demat account was ready to buy stocks at exhorbitant prices.
So lesson number one : Buy more stocks when the markets are most depressed and buy more debt(FDs,bonds etc) when the market is near its peak.More on how exactly to balance and re-balance your portfolio in a future post.
2)Mistakes in Market timing - We try to "time" the market.We try to predict whether the market will go up or down today or in a week or in a month.There is NOBODY who can do this consistently over a long period,because if there was then he/she could amass unimaginable amount of wealth.Yet there is a whole industry of stock/trading analysts who try to predict short term stock movements. And if you thought they got rich because they themselves invest in their own predictions then you are wrong.They got rich because of the money people like us pay them as "prediction fee".
Lesson number two : Forget about timing the market.Even the best investors have given up.Just invest in a SIP and stay away from frequent trading.
3)Mistakes in stock selection - Most investors simply buy overpriced stocks that are hyped up by sellers of stocks i.e. promoters and intermediaries such as brokers and merchant bankers. They end up chasing fashions and fads and eventually suffer heavy losses.A great deal of investors focus on factors that are completely irrelevant in evaluating the worth of the stock and fail to look at simple but vital things before committing money to stocks - things that they would have checked out if they were buying the entire business.
Moreover, stockmarket investors display impatience that they do not display in their real-estate transactions. If an investor buys a sound stock and nothing happens for a couple of years he is likely to get impatient and switch to something that is likely to "move". He will show no such impatience in a property transaction where the average holding period is well in excess of five years. That's why the very same people who make money in the property market lose in the stock market.
4) Temperamental mistakes - The biggest mistakes most investors make are temperamental in nature. For example, after having made a mistake, most investors compound it by refusing to sell at a loss thus blocking their capital in a lousy stock when other fantastic investments can be bought at bargain prices. Another temperamental mistake most investors make is their promptness in taking profits. This type of mistake alone keeps millions of investors from getting rich. If you doubt me, just ask any investor who bought Bajaj Auto, Colgate or Castrol shares in 1980 and sold at a profit in 1985.
Another common mistake is investors' inability to ignore market fluctuations.The market may ignore business success for a while but will eventually confirm it.
So steer clear of these mistakes and you will do much better with stocks.
So how do we remedy this? What are the common pitfalls that we keep repeating over and over again that good investors avoid? There are four broad categories of mistakes
1) Mistakes in Asset Allocation - We buy stocks when the markets are booming and start selling them when the markets start crashing.Its like buying a car when the car price is near its peak and selling it when the prices are most depressed.Any high school kid will tell you that its stupid to buy something at a very high price and then sell it at a very low price.You almost always will end up losing money.Yet we fall into this trap time and again.Consider the current market scenario and you will realize how true this is.Almost everybody is scared to buy stocks now when they are cheap and wants to invest in FDs and bonds.Compare this to September last year,when every tom,dick and harry wanted to own a demat account was ready to buy stocks at exhorbitant prices.
So lesson number one : Buy more stocks when the markets are most depressed and buy more debt(FDs,bonds etc) when the market is near its peak.More on how exactly to balance and re-balance your portfolio in a future post.
2)Mistakes in Market timing - We try to "time" the market.We try to predict whether the market will go up or down today or in a week or in a month.There is NOBODY who can do this consistently over a long period,because if there was then he/she could amass unimaginable amount of wealth.Yet there is a whole industry of stock/trading analysts who try to predict short term stock movements. And if you thought they got rich because they themselves invest in their own predictions then you are wrong.They got rich because of the money people like us pay them as "prediction fee".
Lesson number two : Forget about timing the market.Even the best investors have given up.Just invest in a SIP and stay away from frequent trading.
3)Mistakes in stock selection - Most investors simply buy overpriced stocks that are hyped up by sellers of stocks i.e. promoters and intermediaries such as brokers and merchant bankers. They end up chasing fashions and fads and eventually suffer heavy losses.A great deal of investors focus on factors that are completely irrelevant in evaluating the worth of the stock and fail to look at simple but vital things before committing money to stocks - things that they would have checked out if they were buying the entire business.
Moreover, stockmarket investors display impatience that they do not display in their real-estate transactions. If an investor buys a sound stock and nothing happens for a couple of years he is likely to get impatient and switch to something that is likely to "move". He will show no such impatience in a property transaction where the average holding period is well in excess of five years. That's why the very same people who make money in the property market lose in the stock market.
4) Temperamental mistakes - The biggest mistakes most investors make are temperamental in nature. For example, after having made a mistake, most investors compound it by refusing to sell at a loss thus blocking their capital in a lousy stock when other fantastic investments can be bought at bargain prices. Another temperamental mistake most investors make is their promptness in taking profits. This type of mistake alone keeps millions of investors from getting rich. If you doubt me, just ask any investor who bought Bajaj Auto, Colgate or Castrol shares in 1980 and sold at a profit in 1985.
Another common mistake is investors' inability to ignore market fluctuations.The market may ignore business success for a while but will eventually confirm it.
So steer clear of these mistakes and you will do much better with stocks.
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