“Want to multiply your money? Invest with us for high returns and become a billionaire”
How many times have you read this advertisement and got instantly tempted!
It is completely understood that if you are a retail investor, you got pushed over by this statement.
When we have just stepped into the investment world, we are so distracted by the idea of high returns and fatter wallets that the multiplication of money really amuses us.
Before taking a leap into any investment product, the most important part is to know as much as possible about it.
One needs to take into consideration the investment objective even before chasing returns.
Let’s have a look at the difference between the mindsets of retail investor Vs High net worth
Investor (HNI) and how to overcome it like a pro.
Falling in love with a company’s stock
The problem occurs when you fall in love (get emotionally invested) in the company and ignore the red signals.
A pro-investor keep keen on the changing fundamentals and invests with pure logic and rationality.
A pro trader self-critics himself with questions like,
How will this investment work out for me?
Will this investment help in contributing to my goal?
What are the risks in this investment?
How much am I expecting to earn from this investment?
What other investments do I have already?
These questions assist in looking out for red signals and also help in bringing clarity.
If you cannot do it on your own consult a professional advisory and then make a decision.
Coping a Successful Stock Investor’s Portfolio
Many a time it happens that, you read about a successful stock investor’s story, such as Rakesh Jhunjunwala and google his portfolio.
The search results show his portfolio.
You decide to buy the shares that are mentioned in his portfolio because surely if he has invested in them and made a name for himself in the stock market, then what’s wrong in imitating right?
Completely Wrong!
This is one of the most common investing mistakes retail investors make.
In order to escape the research and homework but still land up in the best fit for themselves, they try to copy the portfolio of a successful stock investor and invest in the same companies.
This approach is faulty due to the following reasons –
A mismatch in investor profiles, objectives and risks– It is not necessary that your risk profile and objectives will be in line with the famous investor you are trying to copy.
He may have more finances at hand and may have a higher risk profile, meaning he can afford to take more risks and may have invested in a particular stock. Coping with such an investment make lead you to a trap.
He may have invested in a risky stock because he can afford to do that financially. If you copy his strategy, you will lose your money and determination to invest in the future.
You don’t know the entry point -Whenever you invest in a company, it is important to know at what level you should invest. When the stocks are listed in the portfolio, you may not know at what price were they bought it may or may not make sense for you to buy them at this particular moment.
For instance, the person whose portfolio you are trying to copy may have bought the stock when its value is Rs 20 and now its value is Rs 100. So now if you go ahead without thinking and buy it at the same price, you may incur a loss when its value comes down.
The entire portfolio may not be public – Another reason is that the entire portfolio of a person is never public. Whenever a big investor invests in a company, retail investors don’t know anything about it till the moment they earn more than 1 percent shares of the company.
When someone’s holding in a company becomes more than one percent it has to be made public. So it’s a huge possibility there are multiple stocks in their portfolio that you may never know and you will have a half baked portfolio based on incomplete information.
Information is ‘public’ – Finally, if you are searching on the internet for the portfolio of a famous stock investor, certainly this information is publicly available to other retail investors as well.
Chances are this has already led to an increased price of the shares. Needless to say, you aren’t doing anything different that would allow you to make more money. So you won’t benefit from such a strategy in the long run.
Chasing returns
Chasing returns while stock picking is a common investing mistake.
If you invest in a stock because it is giving high returns at a given time period, it is not always certain that you will land up in the right investment.
It might be a momentary bull run.
The stock Market is volatile, every stock has its ups and downs.
You need to do a thorough study of the company, its growth objectives, business model, management and other such factors.
Many times, a company that fails in one or more of these factors may also be seeing high valuations in their stock.
Chasing returns is equivalent to blind investing.
Buying Based on Recommendations
We often then turn to our friends and folks for advice on important matters in life and for that matter-of-fact finance is no different.
However, when it comes to stock investing, inclining upon the advice of your friends and simply buying stocks that they bought is not the best way.
This doesn’t work because your risk profile and financial objectives are completely different from the other person and what has worked for him may not work for you.
So, soak in all the information but conduct your own research about the company and convince yourself thoroughly.
Only when you feel your objectives align with that of the company should you go ahead and invest.
Investing like a Retail Investor
Most people look at Stock Market as a medium to make quick money.
One needs to understand Stock Market is not such right place.
And hence this is where the difference between a retail and a pro-investor comes into the picture.
A retail investor engages in ‘buy and sell’, an investor focuses on ‘buy and invest’.
You see the difference!
The investor has a long-term perspective.
Market’s volatile movements might scare you if you are a new investor.
You might think you should redeem your investments because you are losing money but this might be a wrong assessment of the situation.
Your money needs to be invested for at least 7-10 years for your money to show any returns.
There will always be ups and downs in the markets and volatility is a part of its nature.
Your money needs to stay invested for a long period of time.
Early redemptions are one of the most important investment mistakes to avoid.
Until a company grows the share price won’t grow and you need to allow the company and it’s stock the time to grow.
What would happen if you allow your irrational fears to sink in?
Your portfolio will go down, you will sell and exit in haste without giving your investments sufficient time to mature and lose on the opportunity to create wealth.
Not Diversifying Enough
Another common mistake that retail investors make is to invest a large chunk of their capital in buying stocks of only one kind or of a single company and then incurring a loss when the portfolio goes down.
Even if you look at the publicly declared portfolio of successful stock investors like Rakesh Jhunjhunwala, you will see he has stocks across industries and businesses.
Diversification spreads out your risk; it makes sure if some stocks are going down, others gain and nullify your loss, so your portfolio remains balanced.
To sum up, these are some obvious pitfalls to avoid while entering the stock market. Always keep a long-term perspective and conduct thorough research while shortlisting a company.
Do not invest in a company just because a stock market guru has invested in it or it is giving high returns currently.
Once you have placed your bets on a company with strong fundamentals, invest and allow sufficient time for your investments to reap rewards.
Stay patient, stay prudent and enjoy the journey!