Eight mistakes to avoid while investing

Eight mistakes to avoid while investing
Investing is not just about picking winners, but also about avoiding mistakes. Retail investors can be better off if they avoid making the following mistakes.

1. Overconfidence - Don't be unrealistically optimistic A bull market makes retail investors believe that they are geniuses - after all, anything they put money into goes up. This overconfidence in their own abilities leads to a complete disregard of the risks involved. Every new generation that invests in the market ignores past experience. These new investors wrongly believe that stock prices only go up. Don't be overconfident and don't start believing that you have superior skills compared to the market. Recognise that in a bull market you are benefiting because the whole market is going up. If those around you are getting unrealistically optimistic, start managing your risk accordingly. Remember that sometimes markets do come crashing down.

2. Over enthusiasm to trade - Not every ball should be hit Good batsmen realise that some balls outside the off-stump should be left alone. Similarly, professional investors realise that sometimes its better to just stand still than to rush into a stock. Retail investors often make the mistake of "flashing outside the off-stump" because they cannot resist the temptation to trade in every opportunity. And, like an inexperienced batsman, they suffer the same fate. Too much trading will lead to a lot of churn, extra commissions to your broker and huge tax implications for you. Some of the world's best investors follow a buy and hold strategy - you should too.

3. Missing the benefits of compounding of capital - Learn from Einstein Albert Einstein is reputed to have said that compounding of capital is the 8th wonder of the world because it allows for the systematic accumulation of wealth. Even though any one in class 5 could tell you how compounding works, retail investors ignore this basic concept. Compounding of capital can benefit you only if you leave your money uninterrupted for a long period of time. The sooner you start investing, the bigger the pool of capital you will end up with for your middleaged and retirement years. Don't wait to start investing only when you have a large amount of money to put to work. Start early, even if it's with a small amount. Watch this grow to a very large amount with the passage of time.

4. Worrying about the market - But there is no answer to your favourite question Smart investors don't worry about the direction of the market - they worry about the business prospects of the companies whose stocks they own. Retail investors are obsessed with the question "Where do you think the market will go?" This is a wrong question to ask. In fact, no one knows the answer. The right question to ask is whether the company, whose stock you are buying, is going to be a much bigger business 10 years from now or not? Don't take a view on the market, take a view on long-term industry trends and how your chosen companies can create value by exploiting these trends.

5. Timing the market - Around 99% of investors will fail in this strategy Its very difficult to time the market, i.e, be smart enough to buy at the absolute bottom and sell at the absolute top. Professionals understand that timing the market is a wasted exercise. Retail investors always wait for that elusive best opportunity to get in or to get out. But by waiting they let great investment opportunities go by. You should use systematic or regular investment plans to make investments. You'll have to make fewer decisions and yet can accumulate substantial wealth over time.

6. Selling in times of panic - You should be doing the opposite The best opportunity to buy is when the markets are falling and there is fear in the minds of investors. Yet, many retail investors do exactly the opposite. They sell when the markets are falling and buy only when the markets are high. This way they end up losing twice - by selling low and buying high, when they should be doing exactly the opposite. If nothing has changed about the long-term outlook for the company that you own, then you should not sell this company's stock. Use this opportunity to buy more of the same stock in falling markets. Some of the world's biggest fortunes were made by buying when others were selling in panic. Focusing on past performance - Its like driving forward while looking backwards It is a very common perception that because a stock has done well in the past one year, it's the best stock to invest in. Retail investors do not realise that often the best performers will underperform the market in the future because their optimistic outlook has already been priced into the stock. Don't go after hot sectors that are currently producing high returns. Don't let greed drive your investment decisions. Look forward to see whether the gains produced in the past can get repeated or not. Short-term trends of the past might not get repeated in the future.

7. Diversifying too much will kill you - Investing is all about staying alive Beyond a point, having too many names in a portfolio can be counterproductive. You might end up duplicating, or end up taking too much exposure to a sector. Over-diversification can upset your portfolio, especially when you have not done enough research on all the companies you have invested in. If you are an active investor in the stock market, maintain a manageable portfolio of 15-25 names. Instead of adding new names to this portfolio, recognise ideal ones. Then back them with more capital. In the longrun, this will produce better returns for you than adding another 20 names to your portfolio.

8. Investing is all is about patience and discipline. By avoiding mistakes you can improve the long-term performance of your portfolio, whatever the economic conditions prevailing in the market. Courtesy: 

Volatile, risky, range-bound: Experts use these 3 stock market terms very commonly. But it means little for the retail investor

This article was published in Business Standard newspaper dated August 16, 2012.
Volatile, risky, range-bound: Experts use these 3 stock market terms very commonly. But it means little for the retail investor.
If an alien chanced upon popular stock market lingo, it could be forgiven if it concluded stock markets are a branch of zoology, as the talk would be liberally peppered with terms such as bulls, bears, butterfly spreads, etc.

Besides these, it might also be perplexed by three seemingly inexplicable terms which pop up constantly. These are:

The stock market is very volatile: So, what is this volatility? While there is a volatility index with the National Stock Exchange, the term is used loosely, without taking the index numbers into account. And, does it mean that returns will rise or fall? Few experts have an answer.

Given the fear instilled in investors about volatility, they often tend to see this oscillation more as a threat than an opportunity. Hence, the term 'volatility' is often used with a negative, rather than positive, connotation. It is said: "Fortune favours the prepared mind". So, too, investors who undertake the pain of unearthing good stocks through research, actually welcome volatile times, as sudden and sharp rallies and depressions in stock prices provide exit and entry opportunities.

In chemistry, any volatile compound often displays the tendency to evaporate into thin air. Can we extend this to imply that money invested in stock markets always vanishes into thin air? Hopefully not! What they may actually mean is that unlike other investment avenues such as fixed deposits or the Public Provident Fund, stock prices gyrate.

The stock market is very risky: This is an extension of the first term, and alludes to the danger of losing the money one has invested, due to a fall in stock prices. Sure, no one likes to lose money but any fall must be put into perspective. There are myriad examples of stocks falling in the short term and then going on to make new highs over a longer period of time. Investors must only fear permanent, and not temporary, loss of capital. In the Art of War, Sun Tzu has written "Every battle is won or lost before it is ever fought".

Similarly, undertaking the requisite due diligence before purchasing a stock will drastically reduce the chance of permanent loss. Just as in other things in life, stock market investing is a game of probabilities and one can improve one's chances of success by taking the right steps, rather than mindlessly purchasing a stock based on tips and hearsay. Other than this, investors also ignore the fact that the probability of capital loss is not zero even in sovereign bonds. The travails of investors in Greek bonds are a testimony to this. Also, loss of purchasing power due to inflation is an insidious way of losing money. Investors in government small savings schemes and bank fixed deposits face this risk.

The stock market is range-bound: This statement always tops the charts of 'market experts'. Fort-unately for them, this statement is like Lord Vishnu; it has no beginning and no end (although, theoretically, it is bounded by zero). Well, at any given point, the indices will always be in some range. This could be anything from one per cent to 50 per cent or even more. How does such a statement help the viewers/readers? Are they better off after listening to such a prognosis, than they were before? It is a mystery as to why such experts are rarely quizzed on what the so-called range actually is... few will have an answer.

20 Golden rules from Peter lynch

1. Your investor’s edge is not something you get from Wall Street experts. It’s something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.
2. Over the past 3 decades, the stock mkt has come to be dominated by by a herd of professional investors. Contrary to popular belief, this makes it easier for the amateur investor. You can beet the market by ignoring the herd.
3. Often there is no correlation b/w success of a company’s operations and the success of its stock over a few months or even years. In the long term there is 100% correlation b/w the success of the company and the success of the stock. This disparity is the key to making money: it pays to be patient, and to own successful companies.
4. You have to know what you own, and why you own it. “This baby is a clinch to go up!” dosen’t count.
5. Long shots almost always miss the mark
6. Owning stock is like having children –don’t get involved with more then you can handle. The part time stock picker probably has time to follow 8-12 companies, and to buy and sell shares as condition warrant. There don’t have to be more than 5 companies in the portfolio at any one time.
7. If you can’t find any companies that you think are attractive, put your money in the bank until you discover some.
8. Never invest in a company without understanding its finances. The biggest losses in stocks come from companies with poor balance sheets.
9. Avoid hot stocks in hot companies. Great companies in cold, non growth industries are consistent big winners.
10. With small companies, you’re better off to wait until they turn a profit before you invest.
11. If you invest $1000 in a stock, all you can lose is $1000, but you stand to gain $10000 or even $50000 over the time you’re patient. You need to find few good stocks to make a lifetime of investing worthwhile.
12. In every industry and every region, the observant amateur can find gr8 growth companies long before the professionals have discovered them
13. A stock – mkt decline is routine as a Jan blizzard in Colorado. If you’re prepared , it can’t hurt you . A decline is a great opportunity to pick up the bargains left behind by investors who are feeling the storm in panic.
14. Every one has the brain power to make money in stocks. Not every one has the stomach. If you are susceptible of selling everything in a panic, you ought to avoid stocks and stock mutual fund altogether.
15. There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of newscasters. Sell a stock because the company’s fundamentals deteriorate, not because the sky is falling.
16. No body can predict the interest rates, the future direction of the economy, or the stock market. Dismiss all such forecast and concentrate on what‘s actually happening to the companies in which you’ve invested.
17. If you study 10 companies, you will find 1 for which the story is better than expected. If you study 50, you’ll find 5 . There are always pleasant surprises to be found in the stock market companies whose achievements are being overlooked on Wall Street.
18. If you don’t study any companies you have the same chance of success buying stocks as you do in a poker game if you bet without looking at your cards.
19. Time is on your side when you own shares of superior companies. You can afford to be patient –even if you are missed Wal- Mart in the first 5 years, it was a gr8 stock to own in the next 5 years. Time is against you when you own options
20. In the long run, a portfolio of well chosen stocks will always outperform a portfolio of bonds or a money market account. In the long run, a portfolio of poorly chosen stocks won’t outperform the money left under the mattress.

"Contra Investing"

Contra Funds has its genesis in the popular saying "when others zig you zag".

- It basically takes contrasting positions and consciously does not flow with tide at all times.

- Let me tell you a story.

- There was a boy Raju travelling with his family. They met with an accident in which he lost all his family   members. He became orphaned. His relatives turned away from him.

- Raman a friend of Raju's father who knew the family was very fond of Raju.He liked him because he was cultured, well mannered, very studious and always a topper in his class. He knew Raju had the talent to became a very successful person.

- He therefore without any hesitation took Raju under his shelter. He nurtured and educated him sparing no efforts. As expected Raju grew up into a very smart, intelligent and successful person.

- When Raman started aging and becoming weak, it was Raju who stood by him as his shield. He ensured that Raman had all the comforts that he needed.

- From a "contra" perspective one can say that the bet Raman took on Raju was a contra bet. He backed him at a time when others were avoiding him. He did it because he had a clearer understanding of the intrinsic qualities of the boys. He always knew it would be worth his while to help Raju in the long term.

- Similarly a "Contra" fund manager looks for a bad news and searches for opportunities within the bad news. He identifies  companies being shunned by investors due to overall mood and picks them into his "Contra" basket.

- And as we saw in the case of Raju, such companies also may take some time to bounce back. Therefore as an investor one needs to have patience when investing in a contra theme.

This is what contra funds are. Remember, it takes patience for the investment to play out.