7 bad habits that can ruin your entire equity portfolio
The power of compounding is magical. However, its effects get visible only over time.
If you have opted for the first option, your patience is already being put to test. If it’s about quick money, run from stocks and look for other options.
Serious wealth creation in stocks requires a little bit more than money. In contrast, bad manners can put you on the highway to hell, so to speak.
So, what are those bad manners?
Man in a hurry
The power of compounding is magical. However, its effects get visible only over time. At 15 per cent compounding, you can grow your capital 8 times in 10 years and 16 times in 20 years. One of the common traits of most successful stock investors is their ability to invest with a long-term perspective. For such investors, such a period could be easily 10 years or more.
“It is impossible to predict short-term market movements. The stock market is best suited for long-term investing, but less than 1 per cent of investors seem to be successful in creating serious wealth,” said Ramesh Bukka, Co-founder and Director, Entrust Family Office Investment Advisors.
Fundamentals are the bedrock of investing. Unlike in 2013, when equity investing was pariah, investors have got enamoured by the equity rally in recent times and are ignoring fundamentals in order to make quick profits. In heady times like now, investors do not seem to be focused on a company’s operational and financial performance and, most importantly, valuations.
“There are quite a few pockets in the market where business prospects look bright, but fundamentally, valuations are way ahead discounting returns many years ahead. If you get this wrong, be prepared for long periods of zero or even negative returns,” said Bukka.
Markets are never efficient and will run ahead of fundamentals in euphoric times or undervalued in bad times. Most stocks tend to exhibit high volatility and significant short term price fluctuations are here to stay. While there may be setbacks, stock prices will align to business fundamentals in the long run.
Unnecessary risk taking
The stock market is seeing a plethora of ‘compelling’ stories with investors salivating at the prospect of multibagger returns. Stocks tend to run up significantly on announcements of high-profile investors making an entry. Investors need to exercise caution and study the fundamentals and prospects before taking the plunge. Following a market expert without knowing the fundamentals of a company could be a mistake.
Also, often investors get carried away by free advisory from news channels or word-of-mouth recommendations from friends and take investment calls with utmost faith. Such information without authentication can lead to wrong decision making, if it turns out other way. Investors should remain cautious towards market sentiment of fear & greed, as it leads in the wrong direction in most cases. “Any related market news or tips shouldn’t be on standalone basis but rather it has to be followed with diligent research. Further the investor should capitalise on a basic phenomenon of fear and greed when market provides with an opportunity,” said Dinesh Rohira, Founder & CEO, 5nance.com.
Can’t sell my dad’s gift
Anchoring is when you have an emotional attachment to a particular investment, in this case a stock. It happens to the most of us, especially if the stock has given a lot of returns or has been part of the portfolio for umpteen years. Perhaps your dad bought some shares with his first earnings. Or, this was the first stock investment you and your wife made. Such reasons make you unwilling to sell them.
“When your investment strategy is based on emotion, you are not making sound investment decisions. It might feel like that particular stock is safe because you’ve owned it so long, but let’s remember the fate of stocks like Satyam, Pyramid Saimira, Financial Technologies, Unitech,” said Anil Rego, CEO & Founder, Right Horizons.
Up 300%; this stock will rise more
We often come across investors who are extremely greedy. Greed is good in only small measures. A year back, a farm equipment related stock hit extremely low level. Pretty soon, it rebounded as the consumption theme kicked in and gave 200 per cent returns in a year’s times. Investors started believing that the stock will take rest only after hitting life-time highs. It has started correcting again.
“In stock market, when you make out-sized gains, always book profit. In the dotcom boom in 1999-2000, there were many examples where stocks tripled or quadrupled in months. Investors were waiting for the investment to be tax-free. When the fizz ran out, they tumbled like a stone and profits vanished faster than they were made,” said Rego.
Value in the garbage
In a bull market, value stocks are rare. It requires hard work to discover them. Some new investors have a simple formula – they look for the stocks that have hit 52-week lows or all-time lows. If only making money was that simple! Some stocks trade at extremely cheap valuations because they deserve to be so. So, more often investors buy a stock that has hit lows. The stock keeps falling, and they keep buying, and pretty soon double their position. These trades are often one-way highways to hell.
“It’s only very late that the investor realises this folly, and ends up losing a lot of money. Garbage is for throwing the trash. Don’t start looking for gems in trash!” said Rego.
Failing to exit
The greatest challenge investors often face is to exit from his current portfolio. It becomes even more difficult for investors to exit a portfolio when it is in the negative zone. This further erodes wealth if the same strategy is continued. One fails to accept that there are stocks which are fundamentally weak with lower probability of improving anytime soon. This undermines the overall portfolio, where an investor beholds with expectation of recovery. Thus, one should be aware of such fundamental changes where the upside remains unstable. “Remember real money is made only when you exit a profit-making portfolio,” said Rohira.