Saturday, October 10, 2015

How To Avoid Common Investing Mistakes


 Courtesy : Investopedia



1. Investing in Something You Don't Understand
One of the world's most successful investors, Warren Buffett, cautions against investing in businesses you don't understand. This means that you should not be buying stock in companies if you don't understand the business models. The best way to avoid this is to build a diversified portfolio of exchange-traded funds (ETFs) or mutual funds. If you do invest in individual stocks, make sure you thoroughly understand each company those stocks represent before you invest.

2. Falling in Love with a Company
Too often, when we see a company we've invested in do well, it's easy to fall in love with it and forget that we bought the stock as an investment. Remember: you bought this stock to make money. If any of the fundamentals that prompted you to buy into the company change, consider selling the stock.
3. Lack of Patience
How many times has the power of slow and steady progress become imminently clear? Slow and steady usually comes out on top - be it at the gym, in school or in your career. Why, then, do we expect it to be different with investing? A slow, steady and disciplined approach will go a lot farther over the long haul than going for the "Hail Mary" last-minute plays. Expecting our portfolios to do something other than what they're designed to do is a recipe for disaster. This means you need to keep your expectations realistic in regard to the length, time and growth that each stock will encounter.
4. Too Much Investment Turnover
Turnover, or jumping in and out of positions, is another return killer. Unless you're an institutional investor with the benefit of low commission rates, the transaction costs can eat you alive - not to mention the short-term tax rates and the opportunity cost of missing out on the long-term gains of good investments.
5. Market Timing
Market timing, turnover's evil cousin, also kills returns. Successfully timing the market is extremely difficult to do. Even institutional investors often fail to do it successfully. A well-known study, "Determinants Of Portfolio Performance" (Financial Analysts Journal, 1986), conducted by Gary P. Brinson, L. Randolph Hood and Gilbert Beerbower covered American pension-fund returns. This study showed that, on average, nearly 94% of the variation of returns over time was explained by the investment policy decision. In layman's terms, this indicates that, normally, most of a portfolio's return can be explained by the asset allocation decisions you make, not by timing or even security selection.

6. Waiting to Get Even
Getting even is just another way to ensure you lose any profit you might have made. This means you are waiting to sell a loser until it gets back to its original cost basis. Behavioral finance calls this a "cognitive error." By failing to realize a loss, investors are actually losing in two ways: first, they avoid selling a loser, which may continue to slide until it's worthless. Also, there's the opportunity cost of what may be a better use for those investment dollars.
7. Failing to Diversify
While professional investors may be able to generate alpha, (or, excess return over a benchmark) by investing in a few concentrated positions, common investors should not try to do this. Stick to the principal of diversification. In building an ETF or mutual fund portfolio, remember to allocate an exposure to all major spaces. In building an individual stock portfolio, allocate to all major sectors, and selectively to underweight sectors you feel might have potential. Do not allocate more than 5 to 10% to any one investment.
8. Letting Your Emotions Rule the Process
Perhaps the No.1 killer of investment return is your emotions. The axiom that fear and greed rule the market is true. Do not let fear or greed overtake you. Focus on the bigger picture. Stock market returns may deviate wildly over a shorter time frame, but over the long term, historical returns for large cap stocks can average 10 to 11%. Realize that, over a long time horizon, your portfolio's returns should not deviate much from those averages. In fact, you may benefit from the irrational decisions of other investors.
What You Can Do to Avoid these Mistakes
Here are some other ways you can avoid these mistakes and keep your portfolio on track:
Develop a Plan of Action
Proactively determine where you are in the investment life cycle, what your goals are and how much you need to invest to get there. If you don't feel qualified to do this, seek a reputable financial planner. Try to find one who will work for a fee and one who does not receive incentives to sell you high-commission products. Remember why you are investing your money, and you will be inspired to save more and may find it easier to determine the right allocation for your portfolio. Temper your expectations to historical market returns. Do not expect your portfolio to make you rich overnight. A consistent, long-term investment strategy over time is what will build wealth.
Put Your Plan on Automatic
As your income grows, you may want to add more. Monitor your investments. At the end of every year, review your investments and their performance. Determine whether your equity-to-fixed-income ratio should stay the same or change based on where you are in life.

Have Some Fun Money
We all get tempted with the need to spend sometimes. It's the nature of the human condition. So, instead of trying to fight it, go with it. Set aside your "fun investment money." You should limit this amount to no more than 5% of your investment portfolio. Do not use retirement money. Always seek investments from a reputable financial firm. Because some may liken this particular process to gambling, follow the same rules you would in that endeavor. 1) Limit your losses to your principal (do not sell calls on stocks you don't own, for instance), 2) be prepared to lose 100% of your investment and 3) choose and stick to a pre-determined limit to determine when you will walk away.
The Bottom Line
Investing mistakes are part of the investing process. Knowing what they are, when you're committing them and how to avoid them will help you succeed as an investor. To avoid committing them, develop a thoughtful, systematic plan and stick with it. If you must do something wild, set aside some fun money that you are fully prepared to lose. Follow these guidelines, and you will be well on your way to building a portfolio that will provide many happy returns over the long term.

85 comments :

  1. Sir,Sequent is declining mode,any difference in your view on this?

    ReplyDelete
    Replies
    1. Declaiming ? ,More than 150% return in one year

      Delete
  2. Sir in cement sector u also discuss keerthi Ind... India cement is ur also recommended stock?

    ReplyDelete
    Replies
    1. Yes, Keerthi,India cements and Panyam Cement discussed in FB

      Delete
  3. Sir a Ernest request plz give me detail link to find u in mmb

    ReplyDelete
    Replies
    1. http://mmb.moneycontrol.com/india/messageboardblog/boarders/76616c75657069636b

      Delete
  4. Sir i was trying to understand the fundamentals of saint gobin .the quarters are profitable .debt free .products are consumption related .but what didnot understand is the stagnant price movement.sir can u help me to understand whether the stock is investment worthy?

    ReplyDelete
    Replies
    1. If my understanding is correct , the parent company operating another unlisted company also in India

      Delete
  5. Hello VP Sir, thanks for the guidance which is very helpful for your followers. I am relatively a new reader of your blog but have got to learn a lot in short span of time from you.

    You have given your positive opinion on MIC, Pioneer Emb and Subex earlier but unfortunately i was not able to invest at that particular time. Are you still positive on these stocks for fresh investment from average risk taker point of view.

    thanks in advance.

    ReplyDelete
    Replies
    1. Risk level at different price point will be always different . All these stocks suggested for above average risk takers.

      Delete
  6. Sir thanks for this post . please your view upon smruthi organics and necter life sciences your view is very important before investing in these stocks

    ReplyDelete
  7. Excellent article sir. Very useful and practical advices. Thanks for sharing.

    ReplyDelete
  8. Dear Sir, excellent points to share. Do you still believe in Bilcare, though as high risk investment to the extent of forgetting capital in worst case scenario. This company assets are strong so is product but debts is issue as pointed by you earlier

    ReplyDelete
    Replies
    1. Already suggested my negative opinion and requested to take own call when some accounting related issues came to light

      Delete
  9. Thanks Vp sir for giving the valuable information..

    ReplyDelete
  10. Vp sir, are you taking stempede capital ,I have heard about great story to unfold in this particular share.

    ReplyDelete
    Replies
    1. The same promoters another company -Green Fire Agri ( Formerly north gate Technology ) - destroyed lot of wealth of retail investors which crashed from Rs.1100 to current level of Rs.26 ( Adjusted to stock split) .Once there was lot of stories about that company also . I have no confidence to suggest it to anyone. If you can make money , Good , but I am not dare to sail in this boat with you .:)

      Delete
    2. Sir, How to get info like this? You said, the same promoters has another company but what is the way to nail this kind of info.

      --
      Satya

      Delete
  11. Sir, your view on KESORAM IND please. Thanks.

    ReplyDelete
  12. Hello Sir, Kindly give your views on Srs Group and Sml Isuzu.Thanks.

    ReplyDelete
    Replies
    1. Not tracking SRS

      SML isuzu already suggested at Rs.335 ,at CMP of Rs.1290 one can hold

      http://mmb.moneycontrol.com/india/messageboardblog/boarders/76616c75657069636b

      Delete
  13. Dear VP sir
    Pls tel me Alps industries whether in special trading system ? because I tried. But unable to buy. It may be a beginner level question. But pls clarify

    ReplyDelete
  14. Hi, ur view on NMDC and Hindalco industries?

    ReplyDelete
  15. Dear VP ji
    Pls share ur views on 3i infotech. Now it has started CDR.

    ReplyDelete
  16. What is your view on Sahyadri industries ?

    ReplyDelete
  17. Sir,
    can you please give the link to Godavari drugs ltd. that you have published.
    I searched for the same but could't get it.
    Can i add this company in to my portfolio now?

    ReplyDelete
  18. Sir,
    What is ur view on Vaibhav Global, Unitech and Hindalco ?

    ReplyDelete
    Replies
    1. Hindalco is a contra buy , not tracking others

      Delete
  19. Sir,ur views on sudarshan chemicals?

    ReplyDelete
  20. Sir,
    Can you please share your view on some Cloud Solution company like 8K Miles Soft or Cambridge Technology. And mobile app based company like Kellton Tech.

    ReplyDelete
    Replies
    1. My knowledge in this field is limited

      Delete
  21. Dear sir, Any metal stocks a undervalued buy at present Tks

    ReplyDelete
    Replies
    1. Some are buy as a contra bet , like Tata Steel .But patience may test

      Delete
  22. Sir,
    What is your view on Venus remedies

    ReplyDelete
  23. Hello sir

    Mayur uniqourter; I have tried to understand but not found any negative!!! Just want ur words is everything ok with this comapny?

    ReplyDelete
  24. Hi VP,

    Please share your views on FRL and its recent association with PATANJALI. I have seen lot of people buying its product but not sure how it benefit FRL business.
    Thank you,

    ReplyDelete
  25. Sir ur view on FDC and Sun Pharma please.

    ReplyDelete
    Replies
    1. Positive on Sun Pharma for long term

      Not tracking FDC

      Delete
  26. Dear VP Sir Can you give us a few ideas on how to evaluate the honesty and integrity of promoters.

    ReplyDelete
    Replies
    1. There is no equations or hard and fast rules. Track their approach towards minority share share holders for a long time and take decision . Recent de-merger of Blue Star Info's IT business and plan to merge this company with Blue star in an unfavorable ratio is one such instance.

      Delete
  27. Can I know your view on below stocks to buy at current price please?

    Mayur uniqoters
    Agro tech foods
    Vatech wabag
    crisil

    Thanks for your assistance in sharing your views!

    ReplyDelete
    Replies
    1. All these companies are good but in the current business environment don't expect too much speed in growth.

      Delete
  28. Dear VPg, how do I follow you on FB ? Please share link?

    ReplyDelete
  29. Dear Sir,
    Promoters of Patels Airtemp are buying heavily from Open Market. How Positive is this for teh stock and what is the way forward according to you ?

    ReplyDelete
    Replies
    1. My opinion on this stock already shared more than once.

      Delete
  30. Sir request u to kindly share your thots on Inox Leisure, TCI, AurionPro, Bombay Dyeing and FIEM

    ReplyDelete
    Replies
    1. TCI is a decent one , and chances are there for wealth creation on de-merger , enter in dip

      Not tracking others

      Delete
    2. Which One from TCI ? Developer, Finance or Industries...?

      Delete
    3. Bro its just TCI (Transport corporation of India). :-)

      Delete
  31. I am holding welspun india? What to do?

    ReplyDelete
  32. Dear VP sir,

    Any updates on Bluestar infotech after the recent developments.
    "Bluestar infotech sells IT business to Infogain".

    Is it worth to hold?
    Regards,
    RK.

    ReplyDelete
    Replies
    1. Why one need to stick with a promoter who never minds retail investors ?

      Delete
  33. Dear VP Sir,

    Can we buy SATIN Credit at CMP for long term investment, Please advice.

    Thanks in Advance,
    Ram

    ReplyDelete
  34. Satin is an already suggested one

    ReplyDelete
  35. Sir,

    Please share your current views on Pioneer Embroideries. Please reply Sir.

    Thanks
    Yogesh

    ReplyDelete
    Replies
    1. What happened to Pioneer Emb .to change view at present ?

      Delete
  36. Dear VP, Regarding SUBEX.

    With No Promoters, when FCCB is converted, there is a possibility that it will be dumped to OpenMarket right.? Doing so, it obviously could bring down stocks to very lower levels. Correct me if i am wrong.

    Also, some one could barge in and BUY the FCC shares in Subex and run them. A potential takeover candidate indeed. What could be the possibility Sir.?

    Good day, Darshan S.

    ReplyDelete
    Replies
    1. Company's working is more important .If it is fine, there may be many takers.

      Delete
  37. Hello VP sir,

    Thanks for the post. I do understand that GEI is one of the few shares suggested by you which is in red. But I am interested in it, is it a good level to enter? Please let me know.

    Thanks in advance,
    Sindhu

    ReplyDelete
    Replies
    1. Already suggested to shift from GEI to Patels Airtemp

      Delete
  38. Hi sir, please provide your views on Galaxy Ent, Saksoft.

    ReplyDelete
  39. Dear ValuePick Sir,
    What's your view on Shekhawati Poly.
    Any negative regarding this company

    ReplyDelete
  40. Hi VP
    You have recommended AMINES & PLASTICIZERS LTD in the month of January. Does it make sense to buy AMINES & PLASTICIZERS LTD at current levels?
    thanks

    ReplyDelete
  41. Considering the stock split and bonus , recommended one share is equal to ten shares now . Still it is almost 80% above from the recommended level.Not suggesting fresh entry ,long term investors can hold.

    ReplyDelete
  42. Sir please provide ur comments on Vulcan engineers, there doesnt seem be lot of issues with corporate compliances also

    ReplyDelete
    Replies
    1. Yes, the foreign parent company is in trouble .Suggesting to book loss.

      Delete

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