I repeat what I have always stated... do not invest directly in equity shares.
Instead, (please) take the mutual fund route to invest in the stock markets. This is in your best interest.
Here's a real life example of why I say so.
This is the true story of one of my clients. But, I am absolutely certain that many (many) investors sail in the same boat.
Around two years back, Mr. A had approached me to review and restructure his investment portfolio comprising both direct equity and mutual funds.
Mr. A is a highly successful professional working in the IT sector. A typical person from a middle class family, young in age, with limited liabilities, long investment time-frame and earning a high salary, he has the risk appetite to invest in equity.
However, in doing so he made many typical mistakes. And, this has cost him lots and lots of money. Here, I would like to reiterate that his is NOT a unique story. There are thousands and thousands of investors like him (including probably you).
Here are a few lessons to learn from his story.
Lesson 1: Amateur investors cannot beat the professional fund managers
It would indeed be foolish to believe that you can do a better job than a fund manager.
S/he has the expertise to read balance sheets; understands stock markets and economic scenarios; often meets company managements to know their business plans; has a huge research team to support her/him; monitors the portfolio day-in and day-out; and has the right aptitude to deal with stock market volatility.
You, on the other hand, have no time, no expertise, no research capabilities and no aptitude. So the odds of you making higher returns than a fund manager are practically zero. Do you seriously think you can beat Roger Federer?
Lesson 2: Unwieldy and lopsided portfolio is unmanageable
Over the years he had invested in around 26 stocks... yes 26 stocks!
Even the best of the fund managers, managing a corpus running into thousands of crores, will not be able to successfully manage such a huge portfolio. They need a full-fledged research team comprising highly qualified and experienced CAs / MBAs / CFAs. Besides, its a full-day job.
And you think you can single-handedly manage such a massive list of stocks and that too by devoting time only once in a blue moon? Highly unlikely! Read: Your Money Is Begging For 60 Minutes To Turn You Rich.
Moreover, it was a completely lopsided and unbalanced portfolio. In some stocks the investment was only a few thousand rupees. Even if such stocks doubled or tripled, he would hardly made any 'meaningful' money. Whereas in others the investment was in lakhs. One bad stock would be enough to wipe out the gains of the entire portfolio.
Warning: This holds true for numerous people. Mr. A is not the only one to own such an unwieldy and unbalanced portfolio.
Must Read: Two biggest equity investing myths shattered.
Lesson 3: Waiting for the stocks to recover is totally illogical
When I asked him to sell all his stocks and reinvest in mutual funds, he was reluctant. Many of his shares were in red and he didn't want to book a loss. He enquired whether he should wait till the stock markets turned bullish, so that the losses could be recovered or at least minimized.
Most investors do the same. They are not willing to book losses. They stay invested and (hope) to recover their losses before exiting.
This is a completely illogical and irrational thing to do: Why...
Suppose you invested Rs.100 in a particular share, which is now down to Rs.90. In other words, the stock has under-performed.
Firstly, whether you book it or not, it is a loss. By staying invested and not booking the losses, you are not saving anything. It only gives a psychological comfort.
Secondly, what would be the most logical thing to do... to keep Rs.90 in an under-performing stock, OR switch that Rs.90 to another equity share that has a better potential? Naturally, your Rs.90 is likely to grow faster in a new ‘better’ stock than the old ‘loss-making’ one.
If you have taken a wrong turn, you cannot "hope" to reach your destination. You must turn back and take the right road. That's what common sense suggests.
Anyway, he did not act upon my advice... and here's the result.
In Nov 2016, his 26-stocks equity portfolio was valued at about Rs.21 lakhs. Today, it is about Rs.23.75 lakhs. This gives an annualized return of (mere) 5.85% p.a. — even a bank fixed deposit would have yielded better returns.
Had he switched Rs.21 lakhs to the five mutual fund schemes that I had then suggested (@Rs.4.2 lakhs per fund), his returns would have been around 12% p.a. and corpus value today would have been about Rs.26.88 lakhs. Hence, he has lost more than Rs.3 lakhs by not switching his equity portfolio to mutual funds.
This happens with practically everyone — time and again.
So I must again state the obvious...
... Change your boat NOW. Switch from direct equity to mutual funds ASAP.
Instead, (please) take the mutual fund route to invest in the stock markets. This is in your best interest.
Here's a real life example of why I say so.
This is the true story of one of my clients. But, I am absolutely certain that many (many) investors sail in the same boat.
Around two years back, Mr. A had approached me to review and restructure his investment portfolio comprising both direct equity and mutual funds.
Mr. A is a highly successful professional working in the IT sector. A typical person from a middle class family, young in age, with limited liabilities, long investment time-frame and earning a high salary, he has the risk appetite to invest in equity.
However, in doing so he made many typical mistakes. And, this has cost him lots and lots of money. Here, I would like to reiterate that his is NOT a unique story. There are thousands and thousands of investors like him (including probably you).
Here are a few lessons to learn from his story.
Lesson 1: Amateur investors cannot beat the professional fund managers
It would indeed be foolish to believe that you can do a better job than a fund manager.
S/he has the expertise to read balance sheets; understands stock markets and economic scenarios; often meets company managements to know their business plans; has a huge research team to support her/him; monitors the portfolio day-in and day-out; and has the right aptitude to deal with stock market volatility.
You, on the other hand, have no time, no expertise, no research capabilities and no aptitude. So the odds of you making higher returns than a fund manager are practically zero. Do you seriously think you can beat Roger Federer?
 |
| Listen to the wise owl. Don't go buying stocks on your own. |
Lesson 2: Unwieldy and lopsided portfolio is unmanageable
Over the years he had invested in around 26 stocks... yes 26 stocks!
Even the best of the fund managers, managing a corpus running into thousands of crores, will not be able to successfully manage such a huge portfolio. They need a full-fledged research team comprising highly qualified and experienced CAs / MBAs / CFAs. Besides, its a full-day job.
And you think you can single-handedly manage such a massive list of stocks and that too by devoting time only once in a blue moon? Highly unlikely! Read: Your Money Is Begging For 60 Minutes To Turn You Rich.
Moreover, it was a completely lopsided and unbalanced portfolio. In some stocks the investment was only a few thousand rupees. Even if such stocks doubled or tripled, he would hardly made any 'meaningful' money. Whereas in others the investment was in lakhs. One bad stock would be enough to wipe out the gains of the entire portfolio.
Warning: This holds true for numerous people. Mr. A is not the only one to own such an unwieldy and unbalanced portfolio.
Must Read: Two biggest equity investing myths shattered.
Lesson 3: Waiting for the stocks to recover is totally illogical
When I asked him to sell all his stocks and reinvest in mutual funds, he was reluctant. Many of his shares were in red and he didn't want to book a loss. He enquired whether he should wait till the stock markets turned bullish, so that the losses could be recovered or at least minimized.
Most investors do the same. They are not willing to book losses. They stay invested and (hope) to recover their losses before exiting.
This is a completely illogical and irrational thing to do: Why...
Suppose you invested Rs.100 in a particular share, which is now down to Rs.90. In other words, the stock has under-performed.
Firstly, whether you book it or not, it is a loss. By staying invested and not booking the losses, you are not saving anything. It only gives a psychological comfort.
Secondly, what would be the most logical thing to do... to keep Rs.90 in an under-performing stock, OR switch that Rs.90 to another equity share that has a better potential? Naturally, your Rs.90 is likely to grow faster in a new ‘better’ stock than the old ‘loss-making’ one.
If you have taken a wrong turn, you cannot "hope" to reach your destination. You must turn back and take the right road. That's what common sense suggests.
Anyway, he did not act upon my advice... and here's the result.
In Nov 2016, his 26-stocks equity portfolio was valued at about Rs.21 lakhs. Today, it is about Rs.23.75 lakhs. This gives an annualized return of (mere) 5.85% p.a. — even a bank fixed deposit would have yielded better returns.
Had he switched Rs.21 lakhs to the five mutual fund schemes that I had then suggested (@Rs.4.2 lakhs per fund), his returns would have been around 12% p.a. and corpus value today would have been about Rs.26.88 lakhs. Hence, he has lost more than Rs.3 lakhs by not switching his equity portfolio to mutual funds.
This happens with practically everyone — time and again.
So I must again state the obvious...
... Change your boat NOW. Switch from direct equity to mutual funds ASAP.