I started trading in 2007.
In those days, day trading was not very popular (due to high brokerage charges). I used to read some articles and then invested my capital in some stocks. I started feeling confident as my trading results were slightly positive.
At the same time, the Satyam scandal broke out, and it fell like anything. After a few days, Satyam shares were trading between 10-15 levels. Someone told me that either the central government or Mahindra company would take over Satyam. So, it is better to invest some money in it. I had the same view, so I invested around 25K on Satyam shares (around 10-12 levels).
After a week, the news broke out that Mahindra company will take over the Satyam. Share prices started trading in the north direction, and I started selling some shares every day.
I made outstanding profits from this trade, and I started feeling I had cracked the secret method to mint money in the markets. So, I started shortlisting the stocks from the next day, which fell over 80-90% from their peak levels and started investing 5% in them.
I thought I would become a millionaire soon. But within 3 months I lost all the profits and my capital.
Below are the 4 common mistakes committed by most investors. This guest post is originally shared by the author Indrazith Shantharaj
1 – Don’t save/invest enough money
Many people don’t save and invest enough money. I don’t mean everyone should invest in the stock market only, but they should save and invest at least 30% of their monthly income in any investing instruments.
Most people are happy to pay 30% income tax to the government, and they spend (overspend) the remaining salary. It would be best to spend some portion on yourself in case of emergencies and for future life. The only way to implement this is by saving and investing 30% of your monthly salary.
This is an honest admission from an elderly person (he replied to one of my quora answers). So, my only request is don’t face the same fate after a few years/decades. Start saving and investing from now only!
2 – Wrong technique to pick the stocks
It is saddening to see many people pick stocks for long-term investment using a terrible technique.
Most people’s only logic is that XYZ stock fell by 50%, available with a heavy discount. So, let’s invest some money in it.
This is a terrible idea to make money from the investment. When a stock falls by 50%, there is a fundamental problem and a high probability of losing further.
Even if it doesn’t fall further, it might take more time to recover to its original glory.
The above chart is from one of the top reputed companies in India.
Around 2008, it made a high of 850. Later it fell to 400–450 levels.
Many people will buy the shares thinking it is a great investment.
But the price continued to fall further and after a few years, it fell to 60–70 levels which is nothing but 85% loss on the investment!
Instead of this people can pick the index stocks for their investment.
The stock market indices are designed to go up every time.
For example, Nifty is the major index in India, and it is an accurate reflection of the Indian stock market as the top 50 Indian companies form it (representing 13 different sectors).
NSE will keep only the top 50 performing companies on this list. If a company performs poorly, it will remove that company from the list and pick the next best company.
Some of the top companies from this list are HDFC, Reliance, ICICI Bank, Infosys, TCS, etc.
If an investor invests in these top-50 companies for the long-term, he always makes good returns.
All he has to do is diversify his savings on the 50 companies. If NSE removes one company from the list (for any reason), he should exit his holdings in that company and invest the same amount in the new company, which is included in the Nifty-50 list.
In this way, he will always be invested in the index and can generate good returns.
Some index funds invest only in index stocks. So, people can also invest in these funds. The advantage is you don’t have to worry about making 50 transactions (investing in 50 companies) as they will take care of it. But the problem is they will charge some fees.
3 – Booking profits early
Our upbringing always sets some limitations in our minds unconsciously. For example, people start protesting whenever the petrol price crosses Rs.100 in India, and they stop the protest if it comes down to 97-98. Similarly, a person feels damn good when he gets a monthly salary of Rs.1,00,000, and he doesn’t get that feel-good factor even if he gets 98K-99K.
These examples indicate that most round numbers play a crucial role in our lives (we react without much consciousness).
On the same note, whenever the profits cross these round numbers, investors face many difficulties in holding their winning trades. It may be 10% returns for a few people, and for some people, it may be 50K profits.
A few years back, I took a breakout trade in Ceat Ltd.
I entered around 1230 levels and my target was 1400 levels.
I knew from my experience that these breakout trades can run upside for more time.
So, I closed 50% of the position at my target 1400 levels and carried the remaining position.
After a few days, I closed the remaining 50% position around 1600 levels.
But the price went up close to 2000 levels which is over 20% returns even from my 2nd exit point. I would have made very good returns if I would have carried all the positions.
Don’t forget this quote by world-famous trader Jesse Livermore
“It was never my thinking that made the big money for me. It was always my sitting.”
This is the most challenging aspect of trading/investing. One has to learn it from conscious practice.
4 – Averaging
Stop loss is nothing but a price level that indicates that your investment analysis while taking the entry has gone wrong.
So, one has to exit their stock picks whenever they come back to the stop-loss level.
The above image shows some interesting examples.
For example, if you lose 30% of the capital, then you need to make 43% to reach the original capital.
Similarly, if you lose 70% of your capital, then you have to earn 233% to reach the original capital.
So, adhering to stop-loss is crucial to stay in the investment game.
But many investors commit a major blunder than this.
Some people develop affection over the stocks, or they don’t want to accept the fact that their analysis is gone wrong, and hence they keep on adding additional positions even below their stop-loss levels.
This is the quickest way to lose all your capital in the stock market!
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