Wise men have rightly said ‘Investing in stock market is Simple but Not Easy’.
Finding good companies to invest in, is just one of the aspect of investing. There are numerous other aspects to be aware of and to be considered while making any investment decision. Let me cover a few of them.
will cover that in this blog “Common Investment mistakes we make in the market !”
Common Investment mistakes we make in the market !
1. Extrapolating the past
Extrapolating the past in a layman’s language is to expect what happened in the recent past to keep continuing in the future. It is also called as ‘Recency Bias’.
Nobody had thought of a bear market (including me) in 2017 to come knocking so soon in 2018. The market surprises you all the time.
The extrapolation can not be applied either for the market or the company.
The idea is to be vigilant and be aware of what is going in and around the company. Tracking the factors impacting the company performance.
Learning from my mistakes, I have created a checklist on the factors affecting the company and check it on a regular basis. The table may include: Factors affecting the raw materials of the company, how are the end consumers doing, forex risk, product prices(google might give some information) etc.
Regarding market, one should read what happened in the past. If you have witnessed the 2013 bear market and the previous ones, one would be better prepared for the 2018 one.
Common Investment mistakes we make in the market !
2. Investing on probabilities
While the big marquee investor invests mostly on probabilities. But for probabilities to become reality you need to have very good understanding for the space the company is in as well as have the patience for these probabilities to come true.
Retails investors while trying to mimic big ones quite often create their own probabilities with very limited knowledge of the sector or the company. In such cases even if one aspect of the business goes wrong, the probability will go haywire.
For retail investor in my opinion it is better to wait till the probability materializes and then wait for some market correction to take position. And corrections are as common as seasons.
Common Investment mistakes we make in the market !
3. Value Investing vs Value trap
If you would have read about Value Investing, it basically talks about buying something cheap than its current worth. It in essence, takes into account the quantitative aspect.
But market mostly rewards qualitative aspects of a business accompanied with the quantitative ones.
There are numerous instances where value investing has failed. No doubt one should strive to buy cheap but should not ignore the qualitative aspects such as market share, competitive advantage, management quality, pricing power etc
Many buy low quality stock citing the cheap prices, considering it to be value investing where most often they get trapped with the falling business fundamentals.
Eg. I had invested in a company called as Vindhya Telelink in 2014-15. If you quantitatively look at the numbers and the valuation, it looked like a terrific buy. But when you analyze the other aspects of the business, you would come to know it is not that great as it seems to be.
Credit sales was 60-70% of total revenue implying very high working capital. Cash flow from operations is much lesser than profit as well as negative in many years. There was some concerns regarding management as well.
Charlie Munger on paying fair price for good companies
Common Investment mistakes we make in the market !
4. Denial
When you are gung-ho about a stock and the stock has been running, one refuses to look or deny anything negative surrounding the stock. In a way extrapolating the recent past to future.
Denial is way of being over-confident with respect to the company or the market which is usually accompanied with the famous phrase ‘This time its different”. One way to deal with this is to just to google whatever the rumor or the news is, I am sure you might your answer or atleast some clue.
Common Investment mistakes we make in the market !
5. Investing at the peak of company's performance
There are sectors which gets lot of push due to the tailwinds in the sector, taking the share price higher but the tailwind can all of a sudden disappear giving way to headwinds. While it may be possible for the company to continue performing better but that rarely happens. So one needs to keep a tab on the variables. Once you witness worsening situation, it is better to get out.
While many do long term investment but still it is very critical to at least track the quarterly performance of the company and keep a tab on the direction the company is headed.
Common Investment mistakes we make in the market !
6. Getting fixated on certain price
Suppose we have been tracking a company to invest in. And post you started tracking the price moved say from 100 to 120. Quite often it happens that we keep waiting for the price to come back to 100 for us to invest. There are similar biases associated with the previous high you saw, expecting the company to reach the same high without taking into consideration the performance or performance expectations of the company.
This is one of the most difficult aspect to overcome but if you can keep in your conscious mind, it helps.
7. Planning on the exit point
While entry price is important, booking profits is much more important. One way to decide on the exit point is to continue holding till the company is improving its financials. Another way to decide on the exit point is to set if 50% or some other percentage is good enough for you . It all depends on whatever is your goal and align it with your exit point.
Believe me it is quite difficult to take a decision on exit point. If suppose you sold your share for Rs 100 at a 50% profit and later see the share price jump to 150, regret comes to mind and next time you might wait for higher gain. That’s where a pre-determined guideline helps.
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