Avoid these 5 common mistake by investors

In life, everyone makes mistakes. And it is
extremely evident and specifically true
when it comes to investment decisions, as
there is always an element of uncertainty
involved. With all of the historical data
and experience we possess, there is still
no computer program or individual that
will get investment decisions ‘spot on’ all
the time and after every bull run and a
bear market we are all the more wiser.
Herein, we would like to highlight some
common mistakes made by investors and
we are sure as we go by, we will learn
from some newer mistakes in future.
Being impatient and emotional: PATIENCE!
PATIENCE! And more PATIENCE! This is
the key to investing. And along with
patience, a lot of control on emotions.
The one who masters this is the one who
makes money.
Chart pasted below shows the journey of
emotions that one may have gone through
and how an investment of Rs. 1 lakh in
equities would have grown or benefited
you if you had held on to it for a long
period of time.
From the above chart, it is very clear that
patience pays and successful investing
decisions are made rationally rather than
emotionally.
Debt for the long-term and equity for the
short-term: Investors are comfortable in
PPF (15 years); tax-free bonds (10-15
years); fixed deposits (5 years). But the
moment we talk of investment in equity,
the investor’s time horizon is one month
to a year and the moment the price drops,
panic sets in. Actually, in reality it should
be the other way around – long term
investments should go into equities and
short term investments into debt.
Selling winners and holding losers: No
one likes to make a loss but sometimes it
makes sense to book a loss rather than
continue with the decision. It is not
possible to make profits in equity all the
time. The key to investment is to have
more winners thanlosers. However, a
majority of the time investors hold on to
losers and sell winners. A classic case is
that of Kingfisher Airlines. The stock price
was at a high of Rs 73 in 2009 and last
traded closer to Re. 1 in June 2015. There
would be umpteen investors holding this
stock hoping that it will reach their
purchase price.
Buying equity on herd mentality: A
majority of investors buy equities just
because a friend recommends it or based
on a media report. Many would not even
be aware of what the company does. We
do not understand anything about
mobiles, clothes, cars, etc. However, we
always do some research before buying.
In fact, even for a simple bank deposit or
company fixed deposit, we check what the
interest rates are offered on a number of
similar products and then invest. However,
in the case of equity, we just follow
blindly what a friend or the media states.
Ignoring inflation and taxation: These two
go hand in hand and are the most
important factors which we need to
consider in any investment. Firstly, our
focus should be on the post–tax returns.
It is extremely relevant for investors who
are in the highest tax slab. Secondly, the
focus should be on to earn Real Returns
[Actual Return (post-tax) less Inflation].
For example, if you invest in a bank fixed
deposit which returns 9% and assuming
inflation is 8%, your real return could vary
from -1.7% to 0.1%, depending on the
tax-bracket you fall under.
Bottom Line: Investing mistakes are a part
and parcel of the investment process.
Knowing what they are, when you’re
committing them and how to avoid them
should help you to succeed as an
investor. To avoid committing them,
develop a well-thought out, systematic
plan and stick to it.