My mistakes with the stock market

[AtulD]

@shreys

@shreys

Dremanian investing strategy which advocates selection of low PE multiple, BV multiple, price to dividend, price to cash flow stocks. Also, buying stocks in which growth is available for a reasonable price.

Can you please share the book name and the example if possible.

Thanks.

[avneesh]

“There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again, and again, and again. This is because human nature does not change, and it is human emotion, solidly build into human nature, that always gets in the way of human intelligence. Of this I am sure” - Jesse Livermore

My mistakes are also the same as other boarders, there is nothing new. But I believe you have to pay a price to learn those same repetitive lessons.

[Dr_Manoj]

Good observations.I totally agree with first two lessons.Even if we get the ideas from highly respected investors,we must research a lot. Probably,then only we can understand when a low price is too low to hold,or it’s a time to become contrarian and accumulate.
I also had the experience of waiting for years and then selling at less than purchase price in a few cases.Sometimes, interviews of investors are also an eye-opener.I sold a power company share after a long time when I watched Mr. Raamdeo Agrawal saying people did not make money with power companies and companies dealing with renewable sources are the worse for investors. So far ,true.

[Rohitsharma]

Personally experienced the first point. I had 40% exposure in pharma stocks , which was stagnant since 2 years and I was buying. Since last 2-3 months its started increasing and in current market fall giving support to my portfolio.

[ChaitanyaC]

Entered right in the middle of bull market, knew nothing, did not take time to learn, did not even know that something called bull market, valuations, overpay. Had beginners luck, made some profits, saw green and green in the portfolio.

The tide turned and all hell broke loose, now in losses, cannot name the stocks and losses and the reasons, as I am yet to make something out of my mistakes before I declare them.

After spending a year and witnessing how the market behaved almost every day, I finally started reading, understanding and devising a method, an action plan, creating a small circle of competence, taking it slow, hoping to get better with each passing day.

A warm thanks from the bottom of my heart to everyone whose comments I have read these past few weeks, for imparting the wisdom and making me discover the path I should walk.

Thank you everyone.

[edwardlobo]

Bear markets provide a best environment to learn

Bull markets forgive mistakes so you don’t learn and keep investing in a false assumption

[idikasony]

After 4 yrs in Stock market below are few learning’s by myself after Market moved from Typical Indian Cricket flat pitches to swinging conditions of England in last few weeks

Keeping Peak Margin and Valuation as important Sell Criteria as its generally downfall from there for a period of time (Ajanta and Avanti)

Management Say/Do Ratio, transparency, conservative and under promise/over deliver types mostly works better

Proven Business Model rather than Work in Progress type (Avoid Alphageo/BLS Types)

High Growth Rate and a Bit Agressive in Industry as lesser people wants to be with low performers

Always keep checking Story for Headwinds and Uncertainty (It stops Portfolio growth)

Cross check with Competition in Industry for benchmarks/earlier sucesses in Industry.Especially too good to be true

Have Key Monitoring Parameters for Performance as it helps in objective evaluation

Understand various variables/Risk
in business especially Crude Oil related,Inputs Dependency(China API Cycles,Industry Headwinds, Regulatory)

Avoid Major Overseas Subsidaries money maker which are not audited by Indian Auditors

Better to be in Circle of Competence and Network like valuepickr to get different viewpoints

Opportunity Cost is very important for Returns as latch onto Better Risk Reward stories

Wait and Watch patiently in case of any new oppty not visible

Take time and think a bit before commiting to any New Investment to avoid Recency Bias

Sucess comes with Opportunity ( Active Patience for Market cycles dip) matching Preparation (Your homework and study)

Focus on Oppty with PE rerating optionality as Margin of Safety and better risk reward

Keep Observing Froth in Market for move to Cash in certain scenarios

Don’t average unless you have the conviction.

Bear markets should be used to correct mistakes and make the right next moves.

Try and get rid of junk always

Be aggressive not only in buying but even selling out the wrong bets.

Don’t let your holding bias affect your returns in the next upmove in case of corrections

[raghav_sharma]

my stock market mistakes include:

• Falling for confirmation bias
• Buy scrips at 52-week low prices
• Stopping SIPs because of the fall

[vivek_mashrani]

Have consolidated some phases of euphoria and learnings from bull market here…

Vivek Mashrani, CFA

[avneesh]

Cliche lessons that everyone talked about but I realized their meaning after paying a heavy tuition fees:

1. Smallcap investing is landmine investing: I am a product of VP forum. I started my investing journey from this platform and as a result finding the next multibagger became the ultimate dream. I was so obsessed with this mantra “You can generate the alpha and beat the index with small caps” that I never even looked any company above 5000 CR market cap for 3 years. I never even compared the small cap index and NIFTY performance. Ex- Shilpa medicare, Kitex Garments, Shemaroo entertainment, Avanti feeds, Shivalik Bimetal, etc. These all companies had great up moves with far worse down moves. Even if you were lucky to book profits in one company there was more than 90% chance that you will lose in the next small cap, that’s why it’s landmine investing. You never know which one of your stock will blow your portfolio. “Sadly, I could never learn when to book profits.”
   Lesson: Always diversify to make your portfolio stable.

2. Active investing is a zero sum game: My loss is someone else’s gain. Until and unless you’re investing in index only, you’re playing a zero sum game. You might feel that I am not trading futures and options but that’s not true. You can google for this.
   Now, the big question is do I have what it takes to snatch few extra % returns from these big sharks, guys with 30 year’s market experience, fellow VP members, etc. Maybe yes, but so far it has not been easy. Maybe that’s why a lot of smart people have moved completely to index funds because they realized the dopamine hit in chasing the alpha is useless.

I might be wrong as well. Some of us have made good money in small caps. All of these lessons are the outcome of my personal experience. They may be not applicable for all. Cheers to the next coming QE cycle. Let’s get better together as a community and hopefully make some money.

[sahil_vi]

How I invested in Yes Bank and Lost Lakhs of rupees.

• Much before i discovered ValuePickr and screener, I was kind of building a screener of my own, crawling data from websites and using SQL to do the screening part. One of the very first concepts I learned was that of “mean reversion”. If you buy companies with low P/E multiples, then the P/E multiples mean-revert. Sounds so good in theory, but difficult to implement in practice. One of companies I found this way was Yes Bank. it had fallen almost 50% from its all time highs of 400 and was trading at 200 rupees or so. I bought it. The P/E was low, it will mean revert, that is what I thought.
• As i started digging deeper into the story, i convinced myself that yes bank will turn around because “how can RBI allow the 4th largest bank in india to fail”. Oh yes they wouldn’t, but that does not say anything about the wealth of the equity holder, which could potentially be trapped for 10 years. I didn’t understand the concept of opportunity cost back then.
• Mr Gill got appointed. He was a veteran at Deutsche Bank. He would take care. Mr gill gave more interviews than even PM Modi did rallies during an election Campaign. He mentioned “The cost of credit will go up by 150 basis points” and that soothed me. I didn’t understand what he meant, but never mind that. “Mr gill has spoken, and hence it must come to pass” is what I thought. The stock price kept falling, I kept averaging. My dad kept telling me “Don’t catch a falling knife”. I told him “If we dont do something different from the crowd, how can we generate superior returns?”.
• One quarterly results came, then one more then one more. NPAs increasing. Always increasing, Me telling myself “Oh but it is only 4% of the book, how does it matter. 96% will still earn profits so it is ok”. Little did i understand the concept of NIM and the fact that a 4% NPA will completely wipe out all profits for a bank meaning that they won’t even have money left to run everyday operations unless they do some capital raise.
• Ravneet Gill promising that they will raise capital next month, next quarter, “In next 15 minutes, we will raise capital!”. Me feeling the joy of vindication. Oh, well I was right after all. The market was incorrect. I will end up with a multi-bagger even if the price mean-reverts. Potentially planted News stories that indicate “XYZ will invest 2 Billion dollars in Yes bank”. Stock price increasing 10%, 20%. My effective loss going from -60% to -50%. Me feeling a burden lift off of my chest. Nothing panning out in the end. Absolutely nothing at all.
• Me selling my yes bank stock and buying it back after a day in the name of “tax loss harvesting”. It was more like a way for me to ensure that i did not have to see the -70% -80% loss figures.
• The Reserve Bank of India imposed a moratorium on the capital-starved Yes Bank and capped withdrawals at ₹50,000 per account till further orders. Lower circuit after lower circuit. I had had enough. If the RBI itself was forced to clean up the bank, then IMO the equity capital I had invested had already been lost beyond redemption. I sell between 10-20 rupees making a 90-95% loss.

Some Saving Grace

• Although I lost X lakh rupees, thankfully I still understood the concept of position sizing. It was 30% of my portfolio, but my portfolio was small. I understood my own lack of knowledge and hence the direct stock portfolio never formed more than 20% of my net worth (rest of the money was in MF and bank FDs). Overall, i lost 6% of my net worth in yes bank. But i was saved myself by practicing position sizing since day 1.
• I think the most powerful adage I have learned about the stock market is “The stock market is a place where those with money meet those who have experience, and the one with money loses it and is left with experience, and the one with experience gains money”. Definitely true in my case. The amount of knowledge and wisdom I have gained in last 2 years has been wonderful and powerful and empowering.
• I learned that mean reversion is really a long-term concept. If you are at the peak of an expansion phase, then the downward trend is the mean reversion. Valuations and Prices won’t come back to the earlier highs until at least 4-5 years later (for smallcaps and midcaps).
• I learned that it is not enough to just look at some objective metrics or numbers. What matters is the story behind the numbers, as Prof Aswath Damodaran says. Why is a number/metric trending downward? Are we sure it will mean revert?
• One of my earlier learnings in life was that it takes 1000s of hours to become an expert at anything. I’d done this once in School (maths olympiads) and once in college (ML research) but I’d become lazy after starting my job. I wanted the upside (multi-baggers) but i didn’t want to invest the time required to do the research in order to create that upside. My passion for excellence and the sheer power of hard work (putting in the long hours) was revived. The yes bank loss was a very humbling experience for me. Made me realize the power and importance of becoming and staying an ever-evolving learning machine (as Charlie Munger and Mohnish pabrai would say).

[sarthakkumar19_]

Hello Sahil,
Great post!

I think not giving up on equity after a loss but analysing the failure is one big step towards stock market success.

Just wanted to add that concept of mean reversion might not be suitable for individual stocks but more suitable for indices.

Thanks

[sahil_vi]

Hi Sarthak,

Thanks for adding the comment. I would put it a little differently, every instrument in the market has some probability p of mean reverting (in terms of price or valuation).

1. For indices p is kind of always 1 because we replace companies that are not growing with companies that are growing.
2. For individual companies, 0 <= p <= 1 with the precise p for a company depending (not exclusively) on the probability p1 of the earning power (and it’s growth) remaining the same or mean reverting upwards.
3. This is why companies with perceived moats and moats with high longetivity like pi industries, astral poly mean revert with high probability in terms of price and valuation whereas others might not. If the company might go bankrupt, it would be unreasonable to expect p1 and hence p to be high.
4. This argument is rather over-simplistic. In reality we must think about a series of ps: p1 of companies economic situation mean reverting, p2 of the industry still having a high valuation (or high expectations of growth), p3 of the country’s economy having a high growth and finally p4 of the world economy having a high growth. It is also affected by interest rates and their trajectories both globally and nationally.
5. The number of variables becomes much lesser when positing about a country, this is also why mean reversion of countries is easier to predict imo.

Just my 2 cents!

[PRSAUDAG]

One of my colleagues did same like you. I warned him many times not to average. But he kept on doing till around 60/- and stopped. But he did one different thing. He did not give up. At around rs 6/- he invested everything and brought down average cost at rs24/- and came out most of the investment in profit and kept 25% to sale later but got stuck now.

[sarthakkumar19_]

I have a lot respect for people who are able to handle tough subjects like maths and machine learning (probably since I myself found them really tough). But in my limited experience, it helps if we try to keep things less complicated in the stock market (I’m by no means implying that you are overcomplicating, just a general observation).
Thanks

[Malkd]

My biggest mistake is I fall in love with companies. After studying their management, reading up on news everyday, following quarter results, watching their price rise/fall everyday it’s almost impossible to not fall in love and oversee a few faults that end up exploding at some point. I’m sure my returns would be a lot higher if I could time my exit at the right moment and move on to another stock but I always end up saying “wait for 1 more quarter” and end up riding the downtrend too. It’s a good habit holding long term but sometimes letting go is the best option too and I don’t think I’ll ever learn that. It’s just an amazing feeling watching interviews, attending concalls and studying annual reports of the same company for years on end such that you know the company inside out which gives me a true sense of ownership. This recession has really tested my resolve but I’ve still stuck by my companies for worse more than better lol. I’d like to add that another fault I have is I only add companies from sectors I can understand into my portfolio. This makes pharma very difficult for me and I missed out on the pharma madness the last few months. I’ve dipped my toes in now but its taken me almost too long to study this sector. I just hate entering a position without knowing everyhing about it. Sometimes I wish I’d just jump and bough stocks like aurobindo etc back in April instead of sitting on the sidelines trying to figure out APIs and FDA’s lol

[homemaker]

Strength

1. I Select reasonably good stocks.
2. My entry timing sense is OK.
3. I make 50% to 100% gains -more or less on a few stocks

Weakness

1. Absolutely Clueless as to when to exit
2. Seen stocks from 100% gain to come back to buy level or tad lower
3. Frequent averaging down and not really making the desired impact on returns
4. Panic during severe corrections. Esp when portfolio is bit heavy. Thoughts of FD comes in mind

Still striving to find a reliable exit model - trailing stop loss, partial sell when X% up, sell loser quickly, not sell at all- coffee can type , and few others. Honestly, sometimes feel hopeless, if ever will find a steady exit model.

[gurjota]

Firstly just want to applaud your courage to come out and share an in-depth account of such experiences in the stock market - as Ian Cassel says “Investing is a life long education and its best teacher is loss”. And it’s quite evident from your post there are a number of valuable lessons you took from this experience - probably one of the fastest ways to learn and gain experience for any investor.

Personally, I have many many parallels with your story - with my loss in Yes Bank also running into few lacs, believing Ravneet Gill’s stories through multiple interviews, averaging down, few % of net worth gone, etc. etc.

The biggest and most striking aspect which I can clearly recall about this horrific investment is of CNBC anchor Latha Venkatesh who covers all financial companies in depth and can be seen very actively during days of RBI MPC meetings. In Aug-Sep last year, when the stock was falling like a ton of bricks - I have a very vivid memory of her commenting on the stock price fall, she could not understand why it was falling like this and said this multiple times across days “No scheduled commercial bank has ever failed in India’s history”. Then she also indulged in speculation of Paytm’s investment in Yes Bank for capital raise and when that turned out to be a rumour, she tried to talk about speculative investments from other FIIs/FPIs/PE firms as Indian Banking Licenses are a very exclusive thing - not everyone can get it and the difference in interest rates and yields between Western economies and India (3-4% NIMs, etc.) would make Yes Bank a mouth-watering investment for any foreign investor. All the while indicating that the capital raise was only a matter of time. (There were few references to how Global Trust Bank had been merged in early 2000s but I was never aware of the potential risks - that the whole equity can get wiped out before any such drastic measure would happen. It’s only in March when RBI imposed the moratorium did I realize that)

My avg price was around 130 after averaging some more at 30 levels post listening to her. The fact that I took solace in her analysis of Yes Bank’s situation and stayed invested even after the stock price went up 2.5x from Sep lows to 75 levels where I could have booked 40% loss and got out, turned out to be my costliest mistake in the stock market yet and will probably remain amongst my biggest regrets. I finally sold after the RBI imposed the moratorium and had to book an 80% loss!

My biggest lesson from this experience and some other financials was to include more first principles thinking in my investment process. The whole concept of running a bank/NBFC - leveraging upto 10x equity and making a reasonable spread on it is full of risks - probably the riskiest business model for an equity investor! And if you get into bed with the wrong management - that’s a true recipe for disaster. You’d almost never lose money so fast in any other type of un-leveraged business with real cash flows. It’s no wonder many many great investors are so wary of investing in leveraged financials.

One may think why didn’t I learn anything from the Financial crisis - IL&FS / DHFL crisis 12 months before itself? Well that brought forward a completely different balance sheet risk for leveraged financials. It was a Liabilities side of B/S and liquidity crisis - where liquidity dried up. Yes Bank was a Asset side of B/S crisis (massive NPAs through the horrendous lending practices in the bank) snowballing into a Asset+Liabilities crisis.

Add to all of this - Covid-19 has taught us leveraged Financials will remain the perennial whipping boys in any major economic crisis. All of this has had a big effect on me in terms of how I’m dealing with financials.

Now - I’m just rushing to take profits for even so-called relatively safe lenders such as HDFC Bank, Kotak, Bajaj Finance, etc. Better safe than sorry when it comes to leveraged financials.

[Chaitanya_Tanti]

I have something of an opposite problem with investing. I sell stocks at 30-40% returns and see them grow over 100% from my purchase price and worry about missed opportunity. My sense of buying at sensible valuations is kinda alright where I haven’t got stuck but I have exited too many good companies too early to start looking for advice from other investors as well as reading books and browsing valuepickr to find conviction in my picks to hold the shares for long enough period to gain meaningful returns.

[jamit05]

Some investors have conviction in a very few stocks, so once they but them they sell only if there is a fundamental reason.

Whereas, other type of investors buy at every 500 points drop in Nifty, so to speak. And sell in the next rally, or as soon as their interest or CAGR target is met. They believe Nifty drops half a percent several times a year, so buying bluechips is a no brainer.

Either way it’s a good strategy. Why would you want to change what works?