How to do that ?
Do you buy a real estate holding company or a REIT
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 )
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Great thread to learn, especially for newbies like me.
I personally think, I am making a mistake by taking the notion of āMargin of Safetyā based on āIntrinsic Valueā 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 ?
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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 āBeginner Luckā or may be pure luck. And luck does not last longer. I use is a gamblerās 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 āYou cannot become rich on borrowed knowledge.ā 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 itās 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 donāt repeat them.
Remember Charlie Mungerās quote: āI have known no wise people (over a broad subject matter area) who didnāt read all the time-none, zero. Youād be amazed how much Warren reads-and at how much I read. My children laugh at me. They think Iām a book with a couple of legs sticking outā
All the best.
Parag
37 Likes
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 āsabziā 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 āpkā) 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 āblackā 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 
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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 didnāt allocate proper funds to it.
-
Not seeing the valuation part. If I liked a company and could see the growth triggers I wasnāt 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. Didnāt realise low P/E stocks doesnāt mean a good stock and didnāt 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 didnāt turn out to be a good investment. I didnāt 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.
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Interesting. A large number of us do much of what you do/did !
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I have been doing most of the mistakes that are mentioned above but one that stands out for me is what Morpheus says - thereās 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.
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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
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Top 3 mistakes
Biggest mistake is leverage.Second biggest mistake is averaging down.Third biggest is selling early.
1.Leverage includes derivatives
2.Averaging down
3.selling early based on technicals like over bought etc
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I donāt 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.
Kanv
I wanted to post on this thread sometime back and just canāt seem to recollect why I didnāt, too lazy I suppose 
Anyway, thanks @reacher for bringing this back and reminding me!
Wonder where to begin now since Iāve made so many mistakes (including some real blunders!!!) in just 3.5 years of equity investing. All my mistakes havenāt resulted in losses but I will still categorize them as mistakes because I had no business owning most of these companies. Anyway, Iāve 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 canāt get worse than this and people with any sort of education shouldnāt be making these as itās 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 Iād 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 companyās 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. -
I-can-live-with Mistakes
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, wouldnāt regret as valuation multiples were consistently starting to betray earnings growth and felt no MoS in price)
(the kind which should get people fired from jobs / lose their livelihood. Basically it canāt get worse than this and people with any sort of education shouldnāt be making these as itās simply unacceptable)
(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)Iām sure this list is still missing some mistakes which I canāt 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!
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Dear Kanv
This can be a dangerous practice (averaging down), sometime you may get
away but thatās 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,
business etc. - Averaging down basically stems around āprotection of capitalā. 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
practically:
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 shares@ 700
My average price becomes 200 shares @ 850.
on Jan 18 my portfolio is 2.6 lacs being 200 shares @ 1300. Thatās a return
of 90000 on a capital of 1.7 lacs.
Long term capital gain is 90000.
Approach 2: cutting losses
100 shares@1000, sold @900 in the month of June. I received my capital back
of 90000.
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
return.
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
it off.
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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 donāt 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 donāt 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 donāt 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 donāt 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 rationaleās are wrong
Thanks
Kanv
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
or more!
Your PE and investment philosophy I am sure tested one, good luck for
success.
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 āinvestment executionā, 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!
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@The_Confused_Consult
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.
Or
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 canāt be predicted. It canāt 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.
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I am only trying to say donāt try to predict price than build rules.
Risk appetite management is completely a different subject, if one doesnāt
have a risk appetite build into investment philosophy you are just walking
on a rope which burning back.
The risk management includes if not all at least:
-
How do I protect my capital ( whether you use stop loss or time based
exit that is different) -
What is the amount of risk I am ready to commit into a stock?
-
What if scenarios- if a risk goes downside how would I fight back my
capital? -
How would I increase my position and allocate capital accordingly.
I am not referring to entry technique which would rather point to build
pattern for entry which of course comes with a probability of not
happening, referring to build rules so that you cut out emotions and
uncertainty while executing investment.
For example :
If I buy HDFC at 1000, max can I bear is 100 rupees. I donāt care whatever
the reason except a black swan like surgical strike which are unusual and I
may wait.
That saves my capital in first place.
Now if the price goes up I would enter basis either blind intrinsic value
or entry signal based on some technical parameter say like channel break
out. There is no question of prediction or emotion here.
If the price falls again I will get out at my risk appetite level.
Risk appetite I fix basis to capital allocated to portfolio. The percentage
vary of course wildly for trading and investing.
Please differentiate between A. risk appetite B. entry technique C.
portfolio or position management
Trust this clarifies.
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