In life, everyone makes mistakes. And it is extremely evident and specifically true when it comes to investment decisions, as there is always an element of uncertainty involved. With all of the historical data and experience we possess, there is still no computer program or individual that will get investment decisions “spot on” all the time and after every bull run and a bear market we are all the more wiser. Herein, we would like to highlight some common mistakes made by investors and we are sure as we go by, we will learn from some newer mistakes in future.
Being Impatient and Emotional: PATIENCE! PATIENCE! And more PATIENCE! This is the key to investing. And along with patience, a lot of control on emotions. The one who masters this is the one who makes money.
The below chart shows the Journey of emotions that one may have gone through and how an investment of Rs. 1 lakh in equities would have grown or benefited you if you had held on to it for a long period of time.
From the above chart, it is very clear that patience pays and successful investing decisions are made rationally rather than emotionally. Please refer to our article in the September, 2014 issue for a detailed write up.
Debt for the long-term and Equity for the short-term: Investors are comfortable in PPF (15 years); Tax-Free Bonds (10-15 years); Fixed Deposits (5 years). But the moment we talk of investment in equity, the investor’s time horizon is 1 month to a year and the moment the price drops, panic sets in. Actually, in reality it should be the other way around, i.e. long term investments should go into equities and short term investments into debt.
Selling winners and holding losers: No one likes to make a loss but sometimes it makes sense to book a loss rather than continue with the decision. It is not possible to make profits in equity all the time. The key to investment is to have more winners than losers. However, a majority of the time investors hold on to losers and sell winners. A classic case is that of Kingfisher Airlines. The stock price was at a high of Rs 73 in 2009 and is now trading at Re. 1. There would be umpteen investors holding this stock hoping that it will reach their purchase price.
Buying equity on herd mentality: Amajority of investors buy equities just because a friend recommends it or based on a media report. Many would not even be aware of what the company does. We do not understand anything about mobiles, clothes, cars, etc. However, we always do some research before buying. In fact, even for a simple bank deposit or corporate fixed deposit, we check what the interest rates are offered on a number of similar products and then invest. However, in the case of equity, we just follow blindly what a friend or the media states.
Ignoring Inflation and Taxation: These two go hand in hand and are the most important factors which we need to consider in any investment. Firstly, our focus should be on the post-tax returns. It is extremely relevant for investors who are in the highest tax slab. Secondly, the focus should be on to earn Real Returns [Actual Return (post-tax) less Inflation]. For example, if you invest in a bank fixed deposit which returns 9% and assuming inflation is 8%, your real return could vary from -1.7% to 0.1%, depending on the tax-bracket you fall under.
Bottom Line: Investing mistakes are a part and parcel of the investment process. Knowing what they are, when you’re committing them and how to avoid them should help you to succeed as an investor. To avoid committing them, develop a well-thought out, systematic plan and stick to it.