Having met many serious investors and having been in this field for far too long, I have noticed many mistakes…let me list a few here:
1. Holding on to losers: Do you realise that compounding is a friend of +ve returns and a very very big enemy of -ve returns? So if you bought Crest Animation for Rs. 200 or GMR Infra for Rs. 62 – there were 2 mistakes committed:
a) buying shares with very poor fundamentals – and a far bigger mistake was
b) holding on to losers till they wiped themselves out.
If you are an investor based on fundamentals, it is absolutely important to have a deep stop loss. In your own business you KNOW what is happening in the business, however in somebody else’s business you have only their annual reports and market price to go by. Let us say you had a 25% limit. This should have meant that Crest was to be sold at 160 and GMR at about Rs. 50.
HOLDING ON TO LOSERS means you lost an opportunity to earn something somewhere else, and also wiped out your capital.
2. Overdiversification or Underdiversification: I have seen both. When people get ESOPs they hold on as if their life depends on it. Once they leave, they sell in bitterness! Amazingly wrong behavior. Make sure you have a balanced portfolio. Can you imagine the portfolios of the employees of Satyam? Or Crest Animation? or Silverline? there is nothing left.
Remember for every Hdfc, Hdfc bank, TCS, Infosys, Wipro – there are zillions which have gone under.
And then there are others who after confirming that we are talking about a good share – will go and buy 100 shares – and end up with 80 shares in their portfolio. Dammit, you do not need more than 15 shares for a portfolio of Rs. 3 crores – why buy so many small shares? Beats me.
3. Copying too many people: John Templeton and Warren Buffet both are great investors. One believed you had to invest all over the world and one keeps all his money in US based companies. Copying WB is not easy. He says you need not diversify, but is the owner of re-insurance companies. He talks about ‘ethics and morals’ but invests in Coca Cola.
So if you do not know whether you want Growth, Value, ….etc. the market is really a very expensive place to find that out.
The market is a very nice teacher, but it expects you to do the homework. One more problem is it takes the fees in advance. Sigh.
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