Circa 2007, the equity markets are on a roll. Rajesh has just made a quick 30 per cent gain in his equity portfolio, in a matter of days. The tip which he had received and his resultant action — acting on it had brought him this gain. Rajesh was yearning for more. His banker was offering him a personal loan and as Rajesh was having a great ride in his equity investments, he took on this liability.
Circa 2008, October. Rajesh is inconsolable. His equity investments are at 15 per cent of its original price. And besides that, he also has liabilities as he has borrowed money to invest in the equities.
Mr Benjamin Graham, the guru of investing, had once said that individuals who cannot master their emotions are ill-suited to profit from the investment process.
We have come across these incidents multiple times over, after every boom and bust. Equities in the Indian stock market over the last 25 years has given a CAGR return of 16.89 per cent, for year ending March 31st 2010.
Even in the last three years (wherein the equity markets across the globe witnessed a meltdown), the returns have been close to 10.27 per cent. So equity as an asset class is not per se a bad investment. It’s the mindset, through which one makes an investment is the bigger challenge. After all the success in investing is more behavioural than any other particular investing tactics and strategy.
Now lets examine the some of the common investing mistakes:
n Greed: Mr Ivan Boesky was quoted as saying, “You can be greedy and still feel good for yourself.” This is what a majority of the investors experience, when the returns get multiplied in days. The yearning for more continues and the existing benchmark which was set at the time of investment goes for a toss.
n Investing based on tips: Put not your trust in money, but put your money in trust. We invest based on market rumours, not bothering to verify the fundamentals of the investing company. The general idea is my friend has made money and let me also make a quick buck.
n Patience: Rome was not built in a day. So does your wealth. Action is what one wants. The ups and down in the stock ticker is exhilarating. We want to buy and want to double the money almost immediately. If the stock stays flat, we are tempted to sell, forget the fundamentals. Mr Charlie Munger, Mr Warren Buffett and Mr Rakesh Jhunjhunwala have made their monies by also following this being virtue — Patience.
n Trading: This is akin to gambling in a casino, only that we have given a respectable name. The roller coaster ride which one experiences brings in all emotions. If you want to experience these emotions one after the other in no random order, join the ride. Majority of the times, only one person benefits in this — your broker. Every trade by you, brings him the moolah. Mr Buffett has rightly stated: According the name investors to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a romantic.
The list can go on, but the idea here was to share few of the major ones. Equity has to be in one’s portfolio, at the same time avoiding the pitfalls as shared above is also important.
(Vishal Dhawan is a financial planner by profession and founder of Plan Ahead Wealth Advisors Pvt. Ltd. He can be reached at vishal@
planaheadindia.com.)