Investment mistakes by retail Investors and how to avoid them

POSTED BY manish ON March 28, 2009 COMMENTS (15)

“People who take some pain eventually Gain”

Have you invested in the peak of bull run (Nov Dec 2007 or Jan 2008) or in middle of this downturn (Mid of 2008) and now sitting on heavy losses.

In this article we will discuss how and why should we avoid it. This article mainly covers investors who invest there money in some share for relatively short term like 6 months to 2 years, even though its applicable for all kind of investors.

investor mistake

Robert bought 100 shares of Jaiprakash Associates around May 2008, at Rs.300. His reason was simple, The stock has fallen “a lot”, “how low can it go? “, ” What if I don’t buy it and it goes up again, I will miss the profits”.

Does it sound similar?

Then stocks moves upto 350, and he is so furious that why he didn’t out more money. within some days stock comes down to 250. Now he feels that he probably made a mistake and made investments at right decision. He was sad that he is now in loss , he says to himself, that he will get out at cost once it moves up to 300.

Now it comes down to 200, He is not thinking why didn’t he get out at small loss? He is not ready to get out at 250, and he is determined to get out. But it never happens and stock tumbles down to 160, Now he tries to play a trick with market, and wants to prove his point that he is also smart.

He triples his shares by buying additional 200 shares by buying the share at 160 and averages his price to Rs.207, He can now get out once shares move to Rs.200 or 210 and he can get out at cost price or may be he can make some profits also.

But stocks still goes low and reaches low of 45-50. At the time of writing this article, the price for the share is around Rs.90. Probably it will take at least 1-2 yrs for this share to reach Rs.200 levels and that will happen once overall markets stabilizes.

Does all this sound similar to you?

What are the wrong decisions Robert made?

1. Trying to Time the Market :

The one reason was that he was trying to find out if share has made a low. He believes that share has lost a lot of value and will not go further.

Learning : There is an old saying, “Dont catch Falling Knives”, When a share has started its down move, the chances that it will move more down is more than its going up. The overall mood is bad. There is no MRP of shares, there is only market value. Prices are governed by emotions and sentiments, Don’t try to get in middle buying them. Rather short sell it or wait more.

2. Patience :

The other problem was no patience, Just imagine if this person had more patience, What if he waited for stock to go as low as possible and then start its journey upwards and then buy it. I am not saying, its a right time to buy, but current scenario provide much better risk/reward ratio.

Learning : Don’t go against the trend, if markets are falling like hell. don’t mess with it by buying in between. Have patience, No profits are better than losses I guess. Always try to be with the trend, A stock has more chances of going in the same direction of the trend rather than counter trend.

On the day Satyam bad news came in, I don’t know why people bought shares in between it was falling, It fell from 170 to 40-50, But people bought it in between around Rs 120 levels, thinking, “How low it can go”. Eventually some people bought it at 20-25 levels and many have doubled there money in weeks.

Patience helps.

3. No Stop loss or Targets set :

Often people emotions come in between there trading or investing. “If only it comes back to Rs XYZ I will get out”, Once it goes up by Rs PQR more, I will get out”.

People invest without knowing there risk capability, They don’t invest with some target, once your shares rises by 20% in 1 month, you may often think, what if it goes up to 50%, then I will miss out those profits.

They also don’t want to take losses, they only want profits, once prices go against them, they are not ready to get out at small loss. They want there money back. Then prices move a little more down and then this vicious circle of “If only it comes back to this point, I will get out” continues

Learning : Do you invest to be right or to make money. What is your goal? I guess its to make money. So don’t feel bad if you are wrong some times, it happens with everyone. The most important thing is to not let it become so big, that it becomes pain.

Have a stop loss, When you buy something at 300, say to your self that if it comes down to 250, I will take Rs.50 loss and accept I was wrong and move on to find out a new opportunity. And also tell yourself that if it moves to Rs 500, I will get out, take my “excellent profit” and then find out some thing else. Don’t be too greedy.

It hurts in long term. “just a little more” is a not a good idea.

You can read a similar article where I discussed 5 mistakes of my First trade.

Watch this video to know why no Retail Investors make money in the Stock Markets:

Conclusion :

The main idea of investing is to make money, don’t try to prove market that you were correct and no one can make you wrong, keep your emotions at home, If you are wrong, you are wrong, Just accept it, take small loss and try to find out new opportunity. Don’t waste time with the losing trade and give all your time and effort in that.

Know some rules and stick to it. Mainly this is applicable to traders whose time horizon is very less like day or a week, but this also applies to investors. Even if you are investing for long term like 10-20 yrs. Buying a share at low cost can have dramatic affect on your corpus. Just imagine this :

Ajay invests 1 lac in Unitech at Rs.150 just after it fell from 900 levels in Jan 2008. His investment after 30 yrs was 66 lacs.

But Robert waited patiently to let this share go as much down it can be and after markets shows some strength and signs of recovery bought it at Rs.30, His corpus would be Rs.3 crores.

Just imagine the difference of having some patience and respecting some ground rules of investing. It pays .. believe me.

Keep coming to the blog as in coming days I will post an article about how a common person can use basic technical analysis to make his investments more powerful and less risky.

Question for readers : What do you think Robert could have done better? Or How what are the other mistakes which I have not mentioned?

Please post your views/comments/questions. Make it interactive.
I hope you have read my article on : How to use your losses to reduce your taxes

That’s all for now.

15 replies on this article “Investment mistakes by retail Investors and how to avoid them”

  1. Chetan Ambi says:

    Excellent analysis Manish !! I am planning to open demat/trading account this week. Your articles really will help me as a trader/investor.

  2. kaushal says:

    excellent & practical analysis , please keep it up . ultimately it really depends on how practical or greedy an individual is . there are no set piece solutions in trading

    1. Kaushal

      Thanks for your views 🙂

      Manish

    2. Kaushal

      Thanks for your appreciation 🙂

      Manish

  3. Manish Chauhan says:

    @Debu

    whatever you are saying that I accept , and i understand its hard to time the market . and buy putting SL you dont time the market , you dont allow your losses to grow large .

    Anyways , whatever i have told is for a person who wants to be involved in markets to some extent . If a person do not want to be involved a lot in markets and wants to shop stocks once a while in a year , what you are saying makes sense .. accepted 🙂

    I strongly agree with your point on buying on maximum pessimism 🙂 , that was good .and that works everytime 😉

    Thanks to be involved with the discussion , keep visiting 🙂

    Manish

  4. Debu says:

    What you are saying makes sense in theory, but in reality it’s very hard to time the market. Almost it never happens that buying at 300 you can exit at 280 or say enter at 50 to climb it to 200. Fresh example is the last 2 weeks. World over Market rebounded over 20% within 10 days. These things do happen. My point was if you are investing in sound companies for long run and have faith on your research, you can buy more on maximum pessimism, but everyone has their own method.

  5. Manish Chauhan says:

    @Yogi , thanks man … keep visiting ..

    @Debu , There may be cases when averaging down could have helped .But a person should do it at correct time. If you are doing averaging down , it shows that you did not cut your losses earliar . Where as if you had cut your losses earliar , you can then again enter at right time . If things dont work out , you can again get out at small loss and then re-enter .

    All this will take some effort and work , but its worth it .

    I will give you an example .

    Lets say Ajay and Robert are two people.

    Ajay buys Jaiprakash Associates at 300 , then at 150 , then at 50 again , his cost will be around 166 average . Then this share goes up to Rs 300 . Ajay will make profits in this case . The profit would be around 85% .

    Suppose Robert entered at 300 , and cut his losses at 280 . Then again he enters at 150 (because he recognises opportunity) , and gets out at 135 .

    He then again enters at Rs 50 . and then stays with it , now if price goes up to 200, he will make roughly 300% profit … In this case , the mental tension will be less here and at any point the person will be in less loss overall .

    each way has there own advantages and disadvantages , it depends on person to person what they are comfortable with .

    @Anu, Will try to write it soon.

  6. Anu L says:

    I am waiting for your next post on TA. This was an excellent post as always… keep up the good work…
    I am still new to stock market.. still reading and learning stuff… so i am unable to comment on robert.

  7. Debu says:

    Nobody knows how far the price will go down. There is no harm on averaging down, if the fundamentals of the stock are strong. But again there is no point in buying if the basic fundamentals are weak, even if the share price is touching the sky. However you are right in saying people should have target of certain percentage, to get out in either cases of increase or decrease, for added security.

  8. Yogi says:

    Good endeavour Manish!!..Keep them coming..!!

  9. rajnish kumar says:

    thanks manish. i am waiting for your next post

  10. Manish Chauhan says:

    Rajnish

    Lets see point points on what all you said .

    1. You dont know technical analysis . fine , then put some effort and learn it . If you are going to be involved with stock market , it will always help . You dont need anyone to give you links for reading material , just search on net for it , you will get a lot of links . It would hardly take 2-3 days to learn very basics of TA like Support resistance etc . In some of my next posts i will talk on technical anaylisis to basic level which retail investors can learn about .

    2. Regarding satyam case, till the point it was falling , it was a wise decision to not buy it . But once it stopped falling and start moving up . It was a good time to buy , with strict SL below 10-20% your buy price , So that even if the share goes down again , you loose a small part of your money , Dont get afraid of getting into a stock once it starts moving in a direction , I know there is gereral tendency to think that it will now reverse and go back . But we will keep seeing it move up and up and evertime we think , now it will reverse . Its a general problem of psychology , its happens with everyone , you , me and everyone .

    3. First undrstand what is your time horizon , If its in years , then buy in chucks and have a wide SL , if you buy satyam at 20 , have a SL of 14-15 (provided you have entered at a good time , which you will get with some TA) .

    4. Dont listen to experts a lot , Experts often make contradictory statments and because of that some of them are for sure going to be wrong . If i say markets will go up and you say markets will go down , In next 1 year one of us will be called as expert because atleast one of us predicted correctly . Thats bullshit .

    Whatever experts say is probabilistic , It may happen . but its not always be correct . Understand one point today and never forget it .

    Id does not matter where market will go, what matters is that you should know what you will do if markets move some side .

    To different people having different opinion can make money in markets .

    There is a big sayings , “Bears make money , Bulls make money , Pigs get slautered” .

    I hope your questions are answered , if not , ask back .

    Manish

  11. rajnish kumar says:

    ok manish you are righ . but how much a share can go down.no one can predict. retails investor like me don’t know any thing about technical analysis. how to find out stoploss and bottom for a particular scrip ? if you throws some points on technical analysis and can give some link for good tutorial on it , will be helpfull for retails investor.e.g i missed the apportunity in satyam case. when it came to 9 rupees i was online and watching it falling. i scared of going it down to 0 . still most of experts are saying there is one more down leg for bear market left which will make new lows. should i wait for new lows ? please help me out. i am new investor.

  12. Anonymous says:

    Yes Manish u r right. all the facts you explained happens to most of the traders or investors. We sud follow proper rules as u said…

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