How to do that ?
Do you buy a real estate holding company or a REIT
How to do that ?
Some Self note after doing mistakes in stock market:
1.Borrowed Conviction is most dangerous which comes from lack of self confidence. Studying investment books and experience will help up to build up confidence.
2.Management Quality is most important .Past action will decide the fate of company’s future
3.Except Well established/MNC brand in consumer secular sector, no compnany cann’t justify more than 20-25 PE.
4,Investor can’t lost capital when he invested in 15-20PE High BQ,MQ growth Company .
5.To me now a days lot of company hire professionals to write AR to show how their company’s future is rosy . So need not to take them as face value. Always do scuttlebutt and other sources to verify.
6.A concentrated portfolio with some fair valued/ Under Valued good compounder will give you 25-30%CAGR . Patience by holding fair valued/ Under Valued compounders is greatest virtue in investment
I am relatively a new joiner to Stock Investing and such blogs are very educative. The common mistake which I read is selling profitable positions too early. So will it not be a better portfolio process to buy some stock (with an explicit rule) to keep it for at least 3 years or maybe more before selling it? This will ensure that any profitable positions are not sold off too soon.
Has anyone applied any such rules ? What is your opinion ?
There is nice discussion over email between Prof Sanjay bakshi and Vishal Khandelwal on the topic you mentioned (quite similar )
Great thread to learn, especially for newbies like me.
I personally think, I am making a mistake by taking the notion of ‘Margin of Safety’ based on ‘Intrinsic Value’ a bit too seriously and probably avoiding quality stocks unknowingly just because they are above their so called intrinsic value.
But I am not sure, what do you guys do ?
Being an investor in Indian stock market for a fifteen+ year, I have seen many people and myself making many mistakes people have outlined in this post. I think it is good that some people have openly accepted their mistakes, and it is a great way to start learning as one cannot progress much if he does not accept/acknowledge his mistakes.
I have come to a conclusion that one cannot avoid mistakes, they are part of a process . The most important things about mistakes are what we learn from them. I think this is an excellent post for any newbe investor as he would get a quick glance of mistakes to avoid (and what NOT TO DO) in the stock market.
Here are my few things I have observed many successful investor do (I am still learning ):
1- If one is in the stock market to make quick money, he would be disappointed. He may earn good money in few trades, but it will be a “Beginner Luck” or may be pure luck. And luck does not last longer. I use is a gambler’s analogy to make a point. Suppose a gambler start gambling in a casino and start winning. On every win he increase/doubles his bets. If he does not take money out of the table, he may win 100 bets, but it will need just one bet to break him.
2- Hunting for multi-bagger in a bull phase is a recipe for disaster. Hunting ground for them is when the market crashes (like 2001, 2008). It is not that we cannot find multi-bagger, but the odds are stacked against the individual investor.
3- Rakesh Jhunjhunwala has said that “You cannot become rich on borrowed knowledge.” If you are in it for a long term, spend time learning various mental models about the stock market.
4- Be skeptical about management, analyst and whoever is promoting their stocks. More often than not, they have the incentive to promote/sell stock.
5- As an individual investor, you have an edge in term of timeframe. Mutual funds or portfolio investors needs to show returns on a yearly basis. If the stock is going through correction phase and if there is uncertainty about it’s earning, that stocks get dumped heavily. It is a hunting ground for good stocks.
6- Remember what is a skill and luck and play accordingly. If your earlier win is on luck, be true to yourself.
7- Active vs passive. Fidelity (biggest US mutual fund) has done some study of the best investor in the stock market. As per the study the best investors are dead people and who forgot that they have an account with Fidelity (means they did not trade in the stocks). Buying and selling just add to cost and taxes, but not much to returns. By frequent buying and selling, one is making his broker rich.
7- Read, read and read. There is a lot of noise in the media (TV/Paper). Be wary of them. You will real understanding by reading classic investing books. There are many good books, and I am sure they will be mentioned on this website, so I don’t repeat them.
Remember Charlie Munger’s quote: “I have known no wise people (over a broad subject matter area) who didn’t read all the time-none, zero. You’d be amazed how much Warren reads-and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out”
All the best.
I think one has to be extremely extremely extremely stubborn in Bargaining with Mr. Market. You WILL get your intrinsic value (unless its Toooooo conservative) once or twice in a year. Its just that its too long a wait and we just cave in to what Mr. Market demands of us.
Imagine arguing with a whole sabzi mandi for a year for some tons of “sabzi” at a wholesale rate
If this seems not intutitive, consider another situation:
You just get to know that there is a blockbuster movie release (like “pk”) and you desperately want to watch that movie in a good theatre. Now, initially the theatres would always be housefull and to get a ticket, you would have to buy in “black” i.e you have to pay more than what a ticket counter prices it at. But if you wait long enough, there wont be housefull and the tickets would start getting available at the ticket counter. If you wait further more, the tickets rates even at the counter would get cheap.
If you wait even more, the movie would go off the theatre and you would be repenting your whole life
A very interesting thread. After going through all the post by the members I realised I am not the only one who lost its capital to as extreme as 50% in a year. I can tell I am quite novice in the field of investing. The biggest mistakes that I feel I did are as follows:-
Not allocating enough funds to a particular share. This might be a shock to many members but I seriously regret it. From the day I have started investing I saw I had atleast 2-3 stocks out of 20 that I held which were giving my more than 50% return but I didn’t allocate proper funds to it.
Not seeing the valuation part. If I liked a company and could see the growth triggers I wasn’t too concerned about the price part. After reading various books and post in the forum I realised a great business at an exuberant price is a bad deal for your portfolio.
Initially I use to see just three things before investing P/E>10, Price < Book Value and Dividend Yield. Didn’t realise low P/E stocks doesn’t mean a good stock and didn’t use to find the reason for low P/E.
Not knowing the difference between Trading and Investing, which I am still working on to be true. Even if I bought a company which looked good to me but it didn’t turn out to be a good investment. I didn’t use to sell it and book losses, as a result my portfolio ended up having all bad investment.
- Making a portfolio of higher percent of cyclical sectors.
- Averaging on poor performers.
- Buying during all time highs.
- Mix trading with investing.
- Considering P/E as mother of all ratios.
- Too much leveraging without even realizing the downside impact.
- Mix of borrowed convictions.
Interesting. A large number of us do much of what you do/did !
I have been doing most of the mistakes that are mentioned above but one that stands out for me is what Morpheus says - there’s a difference between knowing the path and walking the path. I have dozen odd examples where I KNEW I am making a mistake holding or averaging a HDIL or RIL and such, but I always got cold feet (still do) in taking bold actions that I should have.
I invested all money in to only one sector. I learnt a lesson after 2008 collapse in Infrastructure stocks. And I also did not exit at the right time. I understood that Every one is learning here after reading this post
Top 3 mistakes
Biggest mistake is leverage.Second biggest mistake is averaging down.Third biggest is selling early.
1.Leverage includes derivatives
3.selling early based on technicals like over bought etc
I don’t know if averaging down is a mistake. I have made a lot of money in averaging down quality companies during sharp corrections. Example- I added HDFC bank and IIB when Nifty went 7k and again added HDFC, IIB and Asian Paints during this correction. However averaging down small cap companies can be risky.
I wanted to post on this thread sometime back and just can’t seem to recollect why I didn’t, too lazy I suppose Anyway, thanks @reacher for bringing this back and reminding me!
Wonder where to begin now since I’ve made so many mistakes (including some real blunders!!!) in just 3.5 years of equity investing. All my mistakes haven’t resulted in losses but I will still categorize them as mistakes because I had no business owning most of these companies. Anyway, I’ve tried to categorize my mistakes into a few categories which should also capture my journey as an investor. So here goes:
Ghastly Mistakes (the kind which should get people fired from jobs / lose their livelihood. Basically it can’t get worse than this and people with any sort of education shouldn’t be making these as it’s simply unacceptable)
a. Buying / Selling purely based on stock tips, MMB forum, etc- This is not even a mistake in my opinion. Mistakes are generally pardonable, this is just being STUPID (Ex: Kingfisher Airlines - I still hold some .05% of portfolio to remind myself of such wastefulness, Suzlon, NMDC, Sesa Sterlite, REC, Bank of India)
b. Buying / Selling purely based on Research Reports - I remember bookmarking the Moneycontrol Research Reports page and regularly checking that assuming these guys know it all i.e. easiest way to make money in the market by betting on major research houses
In fact, I was so naive that I’d just calculate the max % difference between current price and target price and buy those companies (Ex: McLeod Russel, Tata Global Beverages)
I actually wanted to start this list by putting Ghastly mistakes at number 0 (I hope reasons are fairly obvious) but the auto-formatting keeps re-numbering automatically to 1 showing more than enough respect for those kinds of mistakes. Anyway, let 's move to number 2
Rookie Mistakes (the kind which a lot of retail investors do commit when they first begin their investing journey and probably do keep committing from time to time throughout the investment journey - but these can be significantly reduced with experience)
a. Buying / Selling without studying company financials, business model, industry dynamics, etc - Like a typical retail investor, thinking that some company’s stock price has fallen a lot therefore makes a good buy. (Ex: Yes Bank, Axis, ICICI, SBI - all bought during the 2013 currency crisis and all sold at 10-20% profits as I had no idea about the business or fundamentals, how to relatively value businesses, etc. - like a rabbit caught in the headlights, no idea what to do next - so sell them!
b. Buying / Selling / Averaging up/down in companies with poor business model / cyclicals / commodity plays / serial equity diluters - Ex: Sintex, NMDC, (both averaged in opposite directions)
c. Buying / Selling without understanding the business model - Ex: Kaveri Seeds, HIL, Tube Investments
d. Selling because of market volatility/over-valuation/pre-empting fall due to poor results and thinking will fall further - Ex: CCL Products (170), Tasty Bite (1700), PI Industries (445)
e. Buying / Selling based on stock story, government capex cycle, macros, etc. Ex: ABFRL, Suzlon, Sintex, etc.
a, Mistakes of Omission - Good/Great businesses not bought feeling they are richly valued. Inability to forecast future improvements in business based on current investments by promoters - Ex: Shilpa Medicare, Ajanta Pharma (both 35-40% of current price)
b. Selling at high valuations not justified by earnings growth of past 4-6 quarters - Ex: Gruh, Repco (stock price is still below my selling levels - but even if they were to move up significantly, wouldn’t regret as valuation multiples were consistently starting to betray earnings growth and felt no MoS in price)
I’m sure this list is still missing some mistakes which I can’t seem to recall. But will keep adding to this list as I remember them or keep making them (hopefully not ).
Paid enough tuition fee, now time to recover it and some!
This can be a dangerous practice (averaging down), sometime you may get
away but that’s purely act of luck.
This is why:
- Selling an investment is not completely forgetting the stock. It remain
on watch list and you keep updating all that required like financials,
- Averaging down basically stems around “protection of capital”. Meaning
if you are ready to accept say 1% of base capital against a particular
stock (say 1000 being 1% of 1 lac capital) you must ensure NOT to cross
risk appetite. Live today to battle tomorrow, how does this works
a. I bought 100 HDFC bank @1000 on Jan 16, my risk appetite stitched at 10%
or 10000 rupees. Lower the risk appetite longer the probability of
survival. This means if the stock reaches 900 I sell them.
b. Now imagine stock fell to 700 in Jan 17 and came back to 1300 on Jan 18.
By June 16 price fell to 900.
Approach 1: averaging down
100 shares @1000
100 [email protected] 700
My average price becomes 200 shares @ 850.
on Jan 18 my portfolio is 2.6 lacs being 200 shares @ 1300. That’s a return
of 90000 on a capital of 1.7 lacs.
Long term capital gain is 90000.
Approach 2: cutting losses
100 [email protected], sold @900 in the month of June. I received my capital back
I made a reentry @700. If I use my same capital of 1.7 lacs in approach 1 I
would 242 shares. On Jan 18 my gross value would be 3.16 lacs or 1.26 lacs
PLUS investment of 90000 in alternate source say even 8% liquid funds for
six month fetches another 4% on 90000!
Long term capital gain of 126000.
This works well subject to:
a. make sure stock doesnt have much spread.
b. transaction costs are minimal (go for discount brokerage).
c. honestly speaking tax is incidence to your activity, if I earn just pay
Thanks for your detailed reply. But my investment parameters are totally different.
- I buy quality companies whose earnings grow and there is a visibility of earnings. Thereby I assume that stock prices in the long run are slaves of their earnings.
- I don’t trade that much for the stocks I average down. My average holding period in my short investment career of 4 yrs is around 1.5 year (Developed this style in last 2.5 yrs. I will write my journey in future).
- Inherently, giving a certain PE to a company means that we are assuming that the business will stay for some time. Hence, buying the same business I like at lower PE makes sense to me (may be wrong, I don’t have your kind of experience ). So If I can buy HDFC bank at a PE of 15 (P/B never worked for HDFC Bank) with 20+ CAGR earnings growth, then why not?
- I don’t leverage or earn my living out of Stock Market though it is kind of a passion. So I am never in a hurry to sell my stocks.
- Sire, I maintain 60- 40 portfolio with 60 in equity and 40 in debt. It is foolish but I don’t compare my equity returns with debt returns because Equities in the shorter run can be volatile. Once in 6 months my portfolio was up by 50% and now it is just 15%.
Please correct if my rationale’s are wrong
At the outset I am happy to know that you are trying to buy good quality
companies with earnings visibility. Please continue to do the hard work.
I am not suggesting you to trade but protect capital, build capital and
reserve capital. Your point no 5 is a classic example of reserve capital. I
took long years to sit on cash, currently I am 84% cash since last 2 months
Your PE and investment philosophy I am sure tested one, good luck for
Where I am drawing your attention is this, ask these questions to yourself.
I have 10000 rupees and five researched stocks, what is best capital
allocation size for each stock, say 2000 each then why.
Same question above, should I invest 10K at one go or pyramid it out?
If I postpone or prepone profit and loss taking points how much CAGR is
impacted? Actually expectancy is key indicator to calculate portfolio
performance rather CAGR.
Some of these area belong to act of “investment execution”, unfortunately I
am trying to optimise my execution after a long time. Still in middle of a
new plan, will spell out investment execution strategy once I am done with.
Hopefully it will impress you to create an additional layer to your already
investment philosophy. Good wishes!
With regards to your example of HDFC bank, being at 1000, 900 and 700 at different times, please note that retrospective it all looks very good. No one can predict when market turns around.
For example, stock movement in HDFC as follows:
Day 1: 1000
Day 10: slow dip to 900 over 10 days
Day 11: 894. You start thinking about selling
Day 12: 902. You hold on
Day 13: 887. You sell off
Day 14: 876. You are happy you sold off.
Day 15: 885
Day 16: 900
Day 17: 910. And keeps risIng. You missed bus.
Day 14 of above
Day 15: 867
Day 20: 800
Day 21: 805. Looks like bottom formed. You re buy
Day 23: 785
Day 25: 750
Day 29: 698
And then starts rising.
Movement just can’t be predicted. It can’t always happen that you sell at 900 and you get to re buy at 700 and it then goes up. Of course, if one is good and lucky enough, it CAN happen, but not always.
So all strategies work, yours also (stop loss one) and others also (averaging one). Different times.
In fact, I used your principle recently. I had purchased Ucal Fuel @152. Sold at 225 in just a month and re brought ugh at 150 when it collapsed. Though, I must tell that I was lucky here. I had just booked profit, nothing more and never expected it to come down. But due to demonetization, all stocks collapsed and I got opportunity to enter once again at 150.
To sum up, all techniques are good as long as one is watchful and alert. We cannot generalize one technique for all situations.