Common Investment Mistakes

Common investor mistakes article is not feelchild of me. Im just republishing the points of an article in rediff. The thought of republishing these points is, may be the fact of, reminding myself the popular mistakes while I make investment. Some of them, I think, I overcame, others Im trying to.

Hope this will be useful to others too.

Mistake No 1: .The first and biggest mistake is not to admit making a mistake

Holding a stock, rather 'fundamentally weak' stock, even after 15-20% loss and still believing it will come back old level may be the idea that one has to revisit. Most of the cases, it fell to 50% level and mind is not trained to accept the fact that mistake has been done; instead blame is put directly on something like global scenario, FII pull out and MF selling.

I remember a famous quote while reading this point - "In stock market its not impotant you lose or gain money, but its important how much money you lose when a stock fall and how much money you earn when stock raise". I think this can be rephrased like "Realizing the mistakes quickly and waiting for real appreciation are important in stock market play".

Mistake No 2: Buy on tips and wanting to make a quick buck

There is no mistake in taking tips. But the mistake is not doing home work to check value of the business interms of earning, profit, track record and divident history. It should be like you invest on a tip not because your close friend or so called analyst suggested but you know your analysis is right.

Mistake No 3: Buying a loser on its way down thinking you are averaging your costs

Averaging can be applied on a fundamentally strong stock which is available bit cheap due to overall market/sector correction. Otherwise money pileup will be with the loser.

Mistake No 4: Ignoring Risk in the investment and looking only at the returns

These days, insurance agents are selling equity linked insurance to people by showing the past performance of the ULIP scheme and illustration chart. Sad part is people start believing the illustration chart as bible and go by the insurance agents words. They dont even know the possible risk of entire capital wipe out in equity linked schemes. In "freakonimic" sense, these insurance people are no different from those days ran-away chit fund people. Fortunately or unfortunately market did not crash to show the real face equity risk. 'Investment is not risky but not knowing the investment is risky'

Mistake No 5: Buying penny stocks thinking they are cheaper and ignoring stocks, which are priced above a certain number like Rs 1000 thinking, they are expensive

This effect can be realized when the stock is traded at sub-thousand levels after the stock split. Infact liquidity should try to drag down the stock price in stock split cases. But in reality, people start thinking sub-thousand price of a stock with FV 5 is cheaper than thousand+ price of FV 10. This madness is well used by the business people to increase the market cap just by splitting the stock.

When a stock is called penny means the business is very small. There are lot of risk tags attached with the small business. Its agreed that profit will be huge when small business turns big business tomorrow. But picking that kind business takes more than the analyst tip. Dont forget, only very few businesses reach the league of infy.

Mistake No 6: Exiting Winners early and sticking to Losers

"Book profit" is the fancy term heard most these days. Everyone loves to book profit and see the money realized in the account. On the contrary, we hate to book loss (who'll like to see loss in the hands?). I believe booking profit is a strategy followed by the broking firms to boost the volume thereby getting more brokerages. Infact first (so called) strategy minimizes the profit, second strategy, of keeping the bad stocks, maximizes the loss.

Mistake No 7: Just thinking but not doing anything

It's very common to hear something like "I kept an eye on this stock, I had this stock in my watch-folio. But this stock has moved a bit by the time I decided to buy. Now I have to rethink after the price movement". At the end of the day, nothing happened except the bad feeling of not buying.
If any business turns your attention, if you believe a particular business will be the the next big thing and if you think the current management will turn the business into winning track then start investing into the business, no matter how big your invetment amount. No point in just watching and felling bad for the missing opportunity

Well, I believe everyone, just like me, may see themselves in these popular list. we'll strive our best to overcome these mistakes. Lets make investments an educated belief rather than just hope.

Note: All the main points are taken from the source article as they sound good for me. Descriptions under each points are my thoughts on the points. You may read the original article in rediff by clicking here.