Below list is in no order, I am listing down the common
mistakes done by most of investor who invest in equities directly. Will keep on
adding more to it.
Buying stocks based on borrowed conviction: Never buy
stock based on the conviction borrowed from other person. Though it looks contrary
as I am writing about stocks and visitors takes clue from it but always check
and test stock on your points and decide only after giving thoughts many times
on it.
No focus on Capital Protection: people always want to
double money in 1 year or even in 6 months, this is possible but comes with a
very high risk. Rather than focusing only on gaining money, first thing you
should look in a stock is whether it will be able to protect my capital.
Not gauging oneself risk appetite: A young investor
can put money in equities but for a senior citizen it is not advisable to put
money in equities. A proper risk assessment of yourself is necessary before
buying into stocks. Hedge by investing in gold.
Failing to Diversify: Don’t put all money in a single
stock. Ideal number of stocks in a portfolio is a debatable thing, but one
should keep only those many stocks in portfolio which he can track easily. Any number
between 10 to 15 stocks is good enough for a portfolio. Keeping 5 or less than
5 stocks is called a super concentrated portfolio which is not advised for
retail investors. It is the greed which influences people to put all money in a
single stock.
Lack of patience: Making money in the stock market
is hard not because finding great companies is difficult but because the best
and easiest-to-understand strategy for winning is so difficult to adhere to.
That strategy can be described in three words: buy and hold. Here
buy and hold doesn’t mean that you buy and never sell that stock, it means that
you need to verify the fundamentals and stock behaviour once in a while.
Frequency for verifying varies from small to large caps. In case of small caps
you need to check the performance frequently as it takes no time in changing
fortunes of a small cap company on either side.
Doing Averaging: People keeps on buying a falling stock
which is not a good practice. You have an investment that drops 50%. How much
must it then gain? The answer may surprise you: it’s 100%, just to break
even. It is better to put money in some other
falling stocks in down market.
Freaking out in market drops: Selling in panic in
falling market. If market falls, every stock falls nothing is exception. Strong
companies on strong foothold with margins improving will come back easily to
previous levels. We have seen it in Feb2016 crash, now all stocks are back or
even breaking 52weeks highs.
Note:
Favorable Sector & Government Push: Always buy
stocks which have favorable sector wind behind them. If sector is moving then
stocks will also move. Example: Currently theme is Make in India, Defense, GST,
Cement, Consumers and Power etc., so if you buy stocks in these sector they
will have tailwind associated with them. These stocks can give good returns
even in falling market sometimes. Jain Irrigation can be considered for this
analysis.
Play on Margin Expansion: Companies which are
on the verge of margin expansion breakout always give superlative returns as
compared to companies which are consistently having margins of 20%+. Example: A
Company having a margin of 7% Is expected to raise it to 12% in next 2 years
will give more returns compared to a company which is currently having 25%
margins and expected to have same 25% going forward.
Debt is not Bad: People try to stay away from the companies which are having debt on their books. Instead of taking immediate call after looking at debt, one should look management perspective about the debt reduction, how they are planning to reduce debt over a period of 2 to 3 years from now. If they are raising debt for expansion plan capex then what is probable period of payback from that expansion?
Free Cash Flow is King: Always check for free cash flow a company is generating, for a company who is on the verge of margin expansion the FCF may not look good but still it can be checked from last 2 quarter results trend.
Debt is not Bad: People try to stay away from the companies which are having debt on their books. Instead of taking immediate call after looking at debt, one should look management perspective about the debt reduction, how they are planning to reduce debt over a period of 2 to 3 years from now. If they are raising debt for expansion plan capex then what is probable period of payback from that expansion?
Free Cash Flow is King: Always check for free cash flow a company is generating, for a company who is on the verge of margin expansion the FCF may not look good but still it can be checked from last 2 quarter results trend.
