1. Timing the market:
First thing to keep in mind is that there is no such thing as timing the markets. Markets these days do not follow a trend that a common investor can grasp or understand.
Broadly yes, you can say that due a certain political or international event the markets may swing up or down, but apart from that one cannot be sure of how much and when the markets will rise and fall. There will be ‘predictions’, ‘projections’, ‘analysis’ and what not but still you as a common investor should not think of ‘timing’ the markets. Instead if you want to start investing, start small, go for a fundamentally strong company that has performed consistently well in the markets for a long term and invest in it and then take it from there.
2. Borrowing for Investing:
Worst possible mistake to be made for any investment and the most catastrophic mistake to invest in shares, is borrowing money to invest. Any investment advisor, financial planner will tell you that borrowing for investment is the worst thing to do. The returns you get will be negated by the interest you have to pay on your borrowings and in case you incur even a slight loss that will result in you bearing a dual loss, which is: interest on the borrowings + repaying principal amount + bearing the loss on investment. I have seen people personally falling in this trap and going deeper. A colleague once followed a tip from his friend and since he did not have ‘substantial’ amount of cash, he took a personal loan (one of the most expensive loans), and invested in the ‘tip’ he received. The markets crashed, he lost quite a bit and then had to borrow from a relative to repay the personal loan and bear the loss, thus going in a spiraling debt trap. Invest with what you have and slowly increase your investments.
3. Thinking you know it all:
Chances are you may have made good profits and since equity is known to give high returns when the markets are good, you may stand to gain a decent amount of returns on investment. If you have been fortunate to gain on the markets by making some random investments, it is great for you. However, do not think that just on that basis you know it all. Share markets are complex and while nothing is impossible, understanding the markets will take considerable amount of time, knowledge, dedication and even then they will remain unpredictable. Biggest of market Gurus and Financial Analysts who appear in slick suits on your television daily giving their ‘expert opinions’ have fallen flat on their faces in the current market scenarios. So don’t get overconfident and think you know it all. Stick to the basics and invest systematically.
4. Holding onto dud shares:
If you have been investing in shares for a long time, you probably know that ultimately prices average out and you may be able to get decent returns on your investment in direct equity. However, this can result in holding onto to dud shares; a common mistake while investing in stock markets. A practical example is of a famous Indian company that came up with an IPO for its foray into the power sector and it opened at about Rs. 400 in 2008, and a lot of people bought the shares at that price as the company was ‘too big to fail’ and in the long run it was sure to give great returns. However, today after almost 5 years that share is languishing at Rs. 65- 70. In such cases the averaging will not work out. It is a good idea to book your loss and get rid of such duds that have not risen even after a long time or else it keeps eating away the profits of your investment portfolio.
5. Thinking short term:
Equity is the best asset class to invest in, which will give you inflation beating returns in the “LONG RUN”. Remember this statement. LONG RUN being the keyword. Short term gains may come once in a while but chances of you losing out is also higher. As mentioned before, if you are a common investor, whose primary profession is not shares trading or dealing in stock markets, look for the long term. Short term trading and speculation should be left for the ‘experts’ or full time share traders and brokers and investment big fishes. Long term investment will give you decent returns and hence the investment mistake of thinking short term should be avoided at all costs.
6. Not being Patient:
Just like thinking short term is a stock market investment mistake, being impatient is another investment blunder. If you invested today and tomorrow the market crashed, don’t think of liquidating it. Be patient. Things will work in the long run. If the company you invested in is fundamentally good and has a proven consistent record in the past, chances are the prices will improve and you will get good returns along the way. Be patient. Remember Investments are not 100 meters sprint races, they are marathons.
7. Buying because a share is low & Selling because it is High:
If you feel a share is attractive to buy just because it is priced lower and will hence rise in price over the years, then this is a BIG mistake. The share can be low due to a lot of factors and may also be a case where the share has fallen steeply from a higher price and is the actual valuation and won’t gain much. Do not make this mistake while investing in shares to just go for a share just because it is priced lower. Similarly, do not think that just because the share is priced higher it will not gain much. Again it all depends on the performance, market trend and past record and fundamentals of the company. Just like you ‘shouldn’t judge a book by the cover’, you shouldn’t be judging a share based on its price.