Top 5 Investing Mistakes

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I missed the rally in TATAMOTORS today. When a stock that you don’t own takes off (+11% since yesterday), you are filled with blinding rage. I made the #1 mistake of letting my individual preference interfere with my investment decision. I never liked Tata cars – I feel that they fall apart in a year and their interiors are sub-par. But turns out I missed the wood for the trees. So I sat down and wrote up a list of 5 mistakes that investors should avoid:

  1. Getting confused between the company’s product and its stock. Very often, you may love the product the company makes. You may love the XUV 500, but that’s not a good reason in itself to own M&M. You may hate Airtel’s service, but that’s not a good reason in itself not to own BHARTIARTL.
  2. Getting caught up in a fad without thinking through the economics. The market goes through periods where everybody is talking up one sector. I have seen infatuation with infrastructure stocks, real estate, FMCG, oil & gas all come and go. The only thing that is guaranteed with infatuation is a nasty hangover. Don’t only focus on the sector du jour. Focus on revenue growth, profitability and valuation of companies across sectors.
  3. Hanging on to your losers. We all make mistakes. But hoping for a miracle that will somehow turn a position that is down 10% is stupidity. You should have a stop-loss, or better yet, a trailing stop. Let the losers go.
  4. Letting go of your winners. This is the corollary to #3. Why sell a stock that’s on a hot streak. Own it till the rally exhausts itself. If you have a trailing stop setup, the exit automatically takes care of itself.
  5. Getting confused between trading and investing. My sincerest advice is to leave intra-day trading to computers. High Frequency Trading (HFT) has pretty much taken over most exchanges in the world, driving down holding periods to seconds (on an average, the holding period of a stock in the US is around 22 seconds.) You cannot compete with the machines. Your “short term” should at least be a month. This allows you to do your homework and focus on the total return of your portfolio.

And for those who owned TATAMOTORS before the results, good job!

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