No human being is perfect — nor am I.
Moreover, there is always a learning curve — we call it Experience.
Therefore, it is not surprising at all that, in last 25-odd years, I have made a fair share of mistakes while investing my capital.
In the process, I have lost Money. However, I have gained Wisdom.
All in all, it has been a great trade-off.
I am a much better and wiser investor now than in the past. As a result, I have earned lot more money than I lost in my initial years as a beginner in my investment journey.
By the way, these mistakes are fairly common. Many had committed the same mistakes before me. And many others have repeated them after me.
I guess it won’t be a bad idea to share some of my investment mistakes with you. So that you don’t lose your hard-earned money, the same way I did. There is a common saying that ‘Those who cannot remember the past are condemned to repeat it.’
Since there is nothing unique about them, I call it a boring story.
Nevertheless… here it is.
My first mistake was the Fear of Loss.
Once upon a time, there were no mutual funds. So we had to perforce invest in the equity markets directly.
In 1990, based on the so-called hottest tip, I bought 100 shares of Company A at Rs.120 per share. Total outlay – Rs.12,000.
However, soon thereafter the Harshad Mehta scam hit the market. And before people could realize, the stock markets had tanked. Within a few months, the share price of Company A had dropped to Rs.15 only. My loss (notional) – Rs.10,500.
For many years thereafter, the Company A continued to trade in the range of Rs.10-20.
I did nothing. I simply did not have the will to book such a huge loss.
I just waited — hoping against hope to at least recover the loss.
Finally, when the share price recovered to around Rs.60, I sold the shares. My loss (actual) – Rs.6,000.
I was happy that instead of losing almost my entire investment, I had lost only 50% of my money (not counting the loss of interest for so many years.)
This, of course, is nothing but absolutely foolish and ridiculous mental accounting.
Ideally, there should have been a stop-loss trigger of say 20-30%. I should have sold, when the price hit Rs.85-90. Then, I should have reinvested this money in a company with better fundamentals. As I once mentioned, equity shares are not for Rip Van Winkle.
In that manner, I would have not only lost only a reasonable sum, but also maybe ended up with an overall gain after the switch.
The bottomline is profit. Whether it comes from A or B or C is immaterial. Yet, we stick to the bad scrips, hoping to recover the loss from the SAME scrip. A more rational approach would be to admit the mistake, move to a better scrip and try to make profit from the new stocks.
My second mistake was to focus on the Share Price (and not the business).
I bought 1000 shares of Bank X at Rs.30. This was in 1995. My outlay – Rs.30,000.
Three years later in 1998, the price had jumped to Rs.100. My investment value – Rs.1 lakh.
I was elated. I sold all the shares and become a lakhpati. (Mind you, in those days, one lakh was a BIG BIG amount).
Unfortunately, my focus was wrong. I was looking at the share price and my profits (i.e. the rearview mirror).
Meanwhile, the Bank X continued with its superlative performance quarter on quarter. As a result, within a matter of few years, the share price had crossed Rs.300 (yes, Rs.300).
Had I focused my attention on the company’s fundamentals (i.e. at the road ahead through the windshield), I would have realized that even at Rs.100, it was priced quite attractively. It had excellent management team, enjoyed high net-interest margins and there were negligible NPAs on the books. In short, it had all the qualities of an equity share that can deliver stunning returns.
Wrong focus and I had missed a ten-bagger.
At best, I should have sold only 300 shares and recovered my initial investment. And thereafter, make whatever the share had to offer... with zero risk.
My third mistake was to Trade in the F&O Market.
Many people consider the Stock Market as an ATM machine.
Buy in the morning. Sell in the evening. And take home a neat sum… everyday.
The Future & Options market makes this still better. It allows you to trade only on a small margin.
Under normal circumstances, you have to pay the full value. If the price of stock Y is Rs.50 and you have Rs.10,000 in your pocket, you can at most buy 200 shares.
But, for trading in the F&O market, you have to pay only the margin money. Suppose the margin is 20%. Thus with Rs.10,000 as margin, you can now buy 1000 shares. [Total outlay = Rs.50 * 1000 = Rs.50,000. Margin Money = 20% * Rs.50,000 = Rs.10,000.]
Say, a couple of days later, the price jumps to Rs.60. You are up by Rs.10 per share. Thus, in the first case you would have gained Rs.2000 only. Whereas, with F&O, your profit is Rs.10,000 i.e. a gain of 100%.
This lure of quick money, has been the cause of many disasters.
What happens if instead the price falls to Rs.40? You are down by Rs.10 per share. Thus, in the first case you would have lost Rs.2000 only. However, with F&O, your loss jumps up to Rs.10,000 i.e. your entire capital is wiped out. (Also, in futures and options trading, you have to close the deal within a month or two. Whereas, if you take delivery, you can wait till the bad times pass.)
I lost around Rs.2 lakhs in the same manner, before I realized that it is not as easy as it appears. No one can predict the market directions. So every trade is a lottery. And, if you try to hedge the risks, the profits would be so small that the charges will eat away most of your gains, if any.
Weapons of Mass Destruction in the world of Finance... yes that's how Mr. Warren Buffett describes the Futures and Options. And when the world's most successful investor says so, we better listen. I didn't... and paid for it. Luckily, I survived. Many don't.
Concluding: Destiny has been kind to me. I have been fortunate enough to get an opportunity to acquire both financial education and experience. Margaret Fuller advocates that “If you have knowledge, let others light their candle in it”. As such, I have always endeavoured to share my knowledge, understanding and experiences with you all... hoping that you benefit from the same.
Moreover, there is always a learning curve — we call it Experience.
Therefore, it is not surprising at all that, in last 25-odd years, I have made a fair share of mistakes while investing my capital.
In the process, I have lost Money. However, I have gained Wisdom.
All in all, it has been a great trade-off.
I am a much better and wiser investor now than in the past. As a result, I have earned lot more money than I lost in my initial years as a beginner in my investment journey.
By the way, these mistakes are fairly common. Many had committed the same mistakes before me. And many others have repeated them after me.
I guess it won’t be a bad idea to share some of my investment mistakes with you. So that you don’t lose your hard-earned money, the same way I did. There is a common saying that ‘Those who cannot remember the past are condemned to repeat it.’
Since there is nothing unique about them, I call it a boring story.
Nevertheless… here it is.
My first mistake was the Fear of Loss.
Once upon a time, there were no mutual funds. So we had to perforce invest in the equity markets directly.
In 1990, based on the so-called hottest tip, I bought 100 shares of Company A at Rs.120 per share. Total outlay – Rs.12,000.
However, soon thereafter the Harshad Mehta scam hit the market. And before people could realize, the stock markets had tanked. Within a few months, the share price of Company A had dropped to Rs.15 only. My loss (notional) – Rs.10,500.
For many years thereafter, the Company A continued to trade in the range of Rs.10-20.
I did nothing. I simply did not have the will to book such a huge loss.
I just waited — hoping against hope to at least recover the loss.
Finally, when the share price recovered to around Rs.60, I sold the shares. My loss (actual) – Rs.6,000.
I was happy that instead of losing almost my entire investment, I had lost only 50% of my money (not counting the loss of interest for so many years.)
This, of course, is nothing but absolutely foolish and ridiculous mental accounting.
Ideally, there should have been a stop-loss trigger of say 20-30%. I should have sold, when the price hit Rs.85-90. Then, I should have reinvested this money in a company with better fundamentals. As I once mentioned, equity shares are not for Rip Van Winkle.
In that manner, I would have not only lost only a reasonable sum, but also maybe ended up with an overall gain after the switch.
The bottomline is profit. Whether it comes from A or B or C is immaterial. Yet, we stick to the bad scrips, hoping to recover the loss from the SAME scrip. A more rational approach would be to admit the mistake, move to a better scrip and try to make profit from the new stocks.
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| Gosh! I made a big mistake with my investment. Someone please help! |
My second mistake was to focus on the Share Price (and not the business).
I bought 1000 shares of Bank X at Rs.30. This was in 1995. My outlay – Rs.30,000.
Three years later in 1998, the price had jumped to Rs.100. My investment value – Rs.1 lakh.
I was elated. I sold all the shares and become a lakhpati. (Mind you, in those days, one lakh was a BIG BIG amount).
Unfortunately, my focus was wrong. I was looking at the share price and my profits (i.e. the rearview mirror).
Meanwhile, the Bank X continued with its superlative performance quarter on quarter. As a result, within a matter of few years, the share price had crossed Rs.300 (yes, Rs.300).
Had I focused my attention on the company’s fundamentals (i.e. at the road ahead through the windshield), I would have realized that even at Rs.100, it was priced quite attractively. It had excellent management team, enjoyed high net-interest margins and there were negligible NPAs on the books. In short, it had all the qualities of an equity share that can deliver stunning returns.
Wrong focus and I had missed a ten-bagger.
At best, I should have sold only 300 shares and recovered my initial investment. And thereafter, make whatever the share had to offer... with zero risk.
My third mistake was to Trade in the F&O Market.
Many people consider the Stock Market as an ATM machine.
Buy in the morning. Sell in the evening. And take home a neat sum… everyday.
The Future & Options market makes this still better. It allows you to trade only on a small margin.
Under normal circumstances, you have to pay the full value. If the price of stock Y is Rs.50 and you have Rs.10,000 in your pocket, you can at most buy 200 shares.
But, for trading in the F&O market, you have to pay only the margin money. Suppose the margin is 20%. Thus with Rs.10,000 as margin, you can now buy 1000 shares. [Total outlay = Rs.50 * 1000 = Rs.50,000. Margin Money = 20% * Rs.50,000 = Rs.10,000.]
Say, a couple of days later, the price jumps to Rs.60. You are up by Rs.10 per share. Thus, in the first case you would have gained Rs.2000 only. Whereas, with F&O, your profit is Rs.10,000 i.e. a gain of 100%.
This lure of quick money, has been the cause of many disasters.
What happens if instead the price falls to Rs.40? You are down by Rs.10 per share. Thus, in the first case you would have lost Rs.2000 only. However, with F&O, your loss jumps up to Rs.10,000 i.e. your entire capital is wiped out. (Also, in futures and options trading, you have to close the deal within a month or two. Whereas, if you take delivery, you can wait till the bad times pass.)
I lost around Rs.2 lakhs in the same manner, before I realized that it is not as easy as it appears. No one can predict the market directions. So every trade is a lottery. And, if you try to hedge the risks, the profits would be so small that the charges will eat away most of your gains, if any.
Weapons of Mass Destruction in the world of Finance... yes that's how Mr. Warren Buffett describes the Futures and Options. And when the world's most successful investor says so, we better listen. I didn't... and paid for it. Luckily, I survived. Many don't.
Concluding: Destiny has been kind to me. I have been fortunate enough to get an opportunity to acquire both financial education and experience. Margaret Fuller advocates that “If you have knowledge, let others light their candle in it”. As such, I have always endeavoured to share my knowledge, understanding and experiences with you all... hoping that you benefit from the same.
