10 Things On Equity Shares You Got It Wrong All This While…
So, you have been trading in equity shares for quite some time and your performance has been quite mixed. You believe that you would be better off investing in bonds and forget about equities. Wait a moment! It is very likely that you have been doing the small things wrong in the equity markets. Remember, success in the equity markets is all about getting the small things right. Here are 10 things we normally tend to get it wrong when it comes to investing in equity shares…
- Trying to average your losses in the stock market. That is the cardinal sin. When you average your losses you are committing the same mistake twice. Also, you are adding your exposure to a stock or sector more than is warranted. A better way will be to keep a stop loss target and exit the position at that point. You can always review and take a fresh view later.
- Trying to trade without a trading plan. What do we understand by a trading plan? In your trading plan, you lay out your goals and objectives. You lay out the risk you are willing to take, you lay out the returns you are expecting and you also lay out the extent of capital that you are willing to risk. When you trade equity shares without a trading plan you are likely to make gross mistakes.
- Borrowing to invest in stock markets. The calculation looks simple! You borrow at 16% with a personal loan and invest in equity shares that could yield 20% in a year. So you make a clean 4% spread. Unfortunately, it is not that simple. It is likely that in the first few months your stock may be 10% down, but your personal loan EMI still needs to be serviced. As the months’ pass, the pressure builds up in your mind and your finances. Borrowing to invest is best avoided. As Keynes said, “Markets can be irrational much longer than you can be solvent”.
- Trying to follow the herd mentality. You buy technology stocks because everyone on the street is buying these stocks. Nobody ever made money by following the herd mentality. Research your stock, weigh your options, assess your risk, talk to your financial advisor and then take an investment call. Don’t buy a stock just because all and sundry are buying it.
- Taking a very short time horizon. When it comes to equities, never take a short time horizon. Even 2-3 years can be a short time to expert positive returns in equity shares. Ideally, your time frame should be over 5 years. Then you stand a reasonable chance of making profits on the stock. You need patience and time to make money in equity shares.
- Neither diversifying nor rebalancing your equity shares is a cardinal sin. If you want to make money on equity shares you need to diversify your risk and also to rebalance your portfolio periodically. There is no point in putting all your eggs in one basket and tying down your entire portfolio performance to a handful of stocks or sectors. Also keep rebalancing your portfolio at regular intervals and tweak the mix based on market realities.
- Being driven by green and fear. It is said that greed and fear are the two basic emotions that drive the share market. The problem is that most of us tend to become greedy and fearful at the wrong time. Ideally, we need to be greedy when markets are underpriced and fearful when markets are richly valued. In reality, we tend to become greedy when the markets are at a peak and fearful when valuations are actually salivating.
- Anticipating profits rather than losses. Like in accounting, trading and investing is also about anticipating losses not profit. If you anticipate profits and create your investment strategy based on that, you are bound to fail. That is because investments always operate in an uncertain environment. It is ok to expect profits but working on that assumption may really not be a very great idea.
- Not doing your homework before investing. Yes this is the fundamental rule about investing in equity shares. You need to invest in what you understand and make an effort why you are buying a stock. Read about the business, ask questions to your financial advisor, talk to other investors in the market and make an effort. After all, when it is about your own money you surely need to put in a serious effort to be right!
- Failing to adapt to changing markets. The great Charles Darwin rightly said that the species that survives the longest is not the one that is the strongest but the most adaptable. The same rule applies to stock markets too. You need to adapt your investment strategy accordingly. For example, no point in holding on to capital goods stocks when the capital investment cycle is turning negative. There is no idea in holding on to steel stocks when the steel cycle has turned negative. When the value focus shifts from oil to IT and pharma; that is where your investment strategy must take you.
More often than not, we get these basics about investing in equity shares wrong. That is what you need to urgently address!