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.

Thinks to learn from Walter schloss

Walter Schloss
1. “I think investing is an art, and we
tried to be as logical and unemotional as
possible. Because we understood that
investors are usually affected by the
market, we could take advantage of the
market by being rational. As [Benjamin]
Graham said, ‘The market is there to
serve you, not to guide you!’.” Walter
Schloss was the closest possible match
to the investing style of Benjamin Graham.
No one else more closely followed the
“cigar butt” style of investing of Benjamin
Graham. In other words, if being like
Benjamin Graham was a game of golf,
Walter Schloss was “closest to the pin.”
He was a man of his times and those
times included the depression which had
a profound impact on him. While his
exact style of investing is not possible
today, today’s investor’s still can learn
from Walter Schloss. It is by combining
the best of investors like Phil Fisher and
Walter Schloss and matching it to their
unique skills and personality that
investors will find the best results. Warren
Buffet once wrote in a letter: “Walter
outperforms managers who work in
temples filled with paintings, staff and
computers… by rummaging among the
cigar butts on the floor of capitalism.”
When Walter’s son told him no such cigar
butt companies existed any longer Walter
told his son it was time to close the firm.
The other focus of Walter Schloos was
low fees and costs. When it came to
keeping overhead and investing expenses
low, Walter Schloss was a zealot.
2. “I try to establish the value of the
company. Remember that a share of stock
represents a part of a business and is not
just a piece of paper. … Price is the most
important factor to use in relation to
value…. I believe stocks should be
evaluated based on intrinsic worth, NOT
on whether they are under or over priced
in relationship with each other…. The key
to the purchase of an undervalued stock
is its price COMPARED to its intrinsic
worth.”
3.”I like Ben’s analogy that one should
buy stocks the way you buy groceries not
the way you buy perfume… keep it simple
and try not to use higher mathematics in
you analysis.” Keeping emotion out of the
picture was a key part of the Schloss
style. Like Ben Graham he as first and
foremost rational.
4. “If a stock is cheap, I start buying. I
never put a stop loss on my holdings
because if I like a stock in the first place,
I like it more if it goes down. Somehow I
find it difficult to buy a stock that has
gone up.”
5. “I don’t like stress and prefer to avoid
it, I never focus too much on market
news and economic data. They always
worry investors!” Like all great investors
in this series, the focus of Schloss was
on individual companies not the macro
economy. Simpler systems are orders of
magnitude easier to understand for an
investor.
6. “The key to successful investing is to
relate value to price today.” Not only did
Schloss not try to forecast the macro
market, he did not really focus forecasting
the future prospects of the company. This
was very different than the Phil Fisher
approach which was focused on future
earnings.
7. “I like the idea of owning a number of
stocks. Warren Buffet is happy owning a
few stocks, and he is right if he is
Warren….” Schloss was a value investor
who also practiced diversification.
Because of his focus on obscure
companies and the period in which he
was investing, Walter was able to avoid
closet indexing.
8. “We don’t own stocks that we’d never
sell. I guess we are a kind of store that
buys goods for inventory (stocks) and
we’d like to sell them at a profit within 4
years if possible.” This is very different
from a Phil Fisher approach where his
favorite holding period is almost forever.
Schloss once said in a Colombia Business
school talk that he owned “some 60-75
stocks”.
9. “Remember the word compounding.
For example, if you can make 12% a year
and reinvest the money back, you will
double your money in 6 years, taxes
excluded. Remember the rule of 72. Your
rate of return into 72 will tell you the
number of years to double your money.”
Schloss felt that “compounding could
offset [any advantage created by] the
fellow who was running around visiting
managements.”
10. “The ability to think clearly in the
investment field without the emotions
that are attached to it is not an easy
undertaking. Fear and greed tend to
affect one’s judgment.” Schloss was very
self-aware and matched his investment
style to his personality. He said once” We
try to do what is comfortable for us.”
11. “Don’t buy on tips or for a quick
move.”
12. “In thinking about how one should
invest, it is important to look at you
strengths and weaknesses. …I’m not very
good at judging people. So I found that it
was much better to look at the figures
rather than people.” Schloss knew that
Warren Buffett was a better judge of
people than he was so Walter’s approach
was almost completely quantitative.
Schloss knew to stay within his “circle of
competence”. Schloss said once: “Ben
Graham didn’t visit management because
he thought figure told the story.”

Things I’ve Learned from Philip Fisher

1. “I had made what I believe was one of
the more valuable decisions of my
business life. This was to confine all
efforts solely to making major gains in
the long-run…. There are two
fundamental approaches to investment.
There’s the approach Ben Graham
pioneered, which is to find something
intrinsically so cheap that there is little
chance of it having a big decline. He’s got
financial safeguards to that. It isn’t going
to go down much, and sooner or later
value will come into it. Then there is my
approach, which is to find something so
good–if you don’t pay too much for it–
that it will have very, very large growth.
The advantage is that a bigger
percentage of my stocks is apt to perform
in a smaller period of time–although it
has taken several years for some of these
to even start, and you’re bound to make
some mistakes at it. [But] when a stock is
really unusual, it makes the bulk of its
moves in a relatively short period of
time.” Phil Fisher understood (1) trying to
predict the direction of a market or stock
in the short-term is not a game where one
can have an advantage versus the house
(especially after fees); and (2) his
approach was different from Ben Graham.
2. “I don’t want a lot of good
investments; I want a few outstanding
ones…. I believe that the greatest long-
range investment profits are never
obtained by investing in marginal
companies.” Warren Buffett once said:
“I’m 15% Fisher and 85% Benjamin
Graham.” Warren Buffett is much more
like Fisher in 2013 than the 15% he once
specified, but only he knows how much. It
was the influence of Charlie Munger
which moved Buffet away from a
Benjamin Graham approach and their
investment in See’s Candy was an early
example in which Berkshire paid up for a
“quality” company. Part of the reason this
shift happened is that the sorts of
companies that Benjamin Graham liked no
longer existed the further way the time
period was from the depression.
3. “The wise investor can profit if he can
think independently of the crowd and
reach the rich answer when the majority
of financial opinion is leaning the other
way. This matter of training oneself not
to go with the crowd but to be able to zig
when the crowd zags, in my opinion, is
one of the most important fundamentals
of investment success.” The inevitable
math is that you can’t beat the crowd if
you are the crowd, especially after fees
are deducted.
4. “Usually a very long list of securities is
not a sign of the brilliant investor, but of
one who is unsure of himself. … Investors
have been so oversold on diversification
that fear of having too many eggs in one
basket has caused them to put far too
little into companies they thoroughly
know and far too much in others which
they know nothing about .” For the “know-
something” active investor like Phil
Fisher, wide diversification is a form of
closet indexing. A “know-something”
active investor must focus on a relatively
small number of stocks if he or she
expects to outperform a market. By
contrast, “know-nothing” investors (i.e.,
muppets) should buy a low fee index
fund.
5. “If the job has been correctly done
when a common stock is purchased, the
time to sell it is almost never.” Phil
Fisher preferred a holding period of
almost forever (e.g., Fisher bought
Motorola in 1955 and held it until 2004).
The word “almost” is important since
every company is in danger of losing its
moat.
6. “Great stocks are extremely hard to
find. If they weren’t, then everyone would
own them. The record is crystal clear that
fortune – producing growth stocks can be
found. However, they cannot be found
without hard work and they cannot be
found every day.” Fisher believed that the
“fat pitch” investment opportunity is
delivered rarely and only to those
investors who are willing to patiently work
to find them.
7. “Focus on buying these companies
when they are out of favor, that is when,
either because of general market
conditions or because the financial
community at the moment has
misconceptions of its true worth, the
stock is selling at prices well under what
it will be when it’s true merit is better
understood.” Like Howard Marks, Fisher
believed that (1) business cycles and (2)
changes in Mr. Market’s attitude are
inevitable. By focusing on the value of
individual stocks (rather than just price)
the investor can best profit from these
inevitable swings.
8. “The successful investor is usually an
individual who is inherently interested in
business problems.” A stock is a part
ownership of a business. If you do not
understand the business you do not
understand that stock. If you do not
understand the business you are investing
in you are a speculator, not an investor.
9. “The stock market is filled with
individuals who know the price of
everything, but the value of nothing.”
Price is what you pay and value is what
you get. By focusing on value Fisher was
able to outperform as an investor even
though he did not look for cigar butts.
10. “It is not the profit margins of the
past but those of the future that are
basically important to the investor.” Too
often people believe that the best
prediction about the future is that it is an
extension of the recent past.
11. “There is a complicating factor that
makes the handling of investment
mistakes more difficult. This is the ego in
each of us. None of us likes to admit to
himself that he has been wrong. If we
have made a mistake in buying a stock
but can sell the stock at a small profit, we
have somehow lost any sense of having
been foolish. On the other hand, if we sell
at a small loss we are quite unhappy
about the whole matter. This reaction,
while completely natural and normal, is
probably one of the most dangerous in
which we can indulge ourselves in the
entire investment process. More money
has probably been lost by investors
holding a stock they really did not want
until they could ‘at least come out even’
than from any other single reason. If to
these actual losses are added the profits
that might have been made through the
proper reinvestment of these funds if
such reinvestment had been made when
the mistake was first realized, the cost of
self-indulgence becomes truly
tremendous.” Fisher was very aware of
the problems that loss aversion bias can
cause.
12. “Conservative investors sleep well.” If
you are having trouble sleeping due to
worrying about your portfolio, reducing
risk is wise. Life is too short to not sleep
well, but also fear can result in mistakes.

Interesting facts About Dividends all should know

1. People think that if a company does not pay dividends then it is doing
nothing for the Stock Holder.

Increase in Dividend Rate = Favorable

Decrease in Dividend Rate = Nearly always called Unfavorable

2. It might be so that the company is spending its earnings in building up a
new plant, launching a new product or maybe installing some major cost
saving equipment in an old plant, which might benefit the shareholder
more than just getting dividends.

3.Companies like MICROSOFT and BHARTI have never paid dividends
and still they have given much higher returns to their investors.

Fifteen Points to Look for before investing in a common stock

1. Does the company have products or services with sufficient
market potential to make possible a sizable increase in sales for at
least several years?

2. Mgt’s determination to continue to develop products or processes
that will still further increase total sales potentials when the
growth potentials of currently attractive product lines have largely
been exploited?

3. How effective are the company’s research-and-development
efforts in relation to its size?

4. Does the company have an above-average sales organization?

5. Does the company have a worthwhile profit margin?

6. What is the company doing to maintain or improve profit
margins?

7. Does the company have outstanding labor and personnel
relations?

8. Does the company have outstanding executive relations?

9. Does the company have depth to its management?

10. How good are the company’s cost analysis and accounting
controls?

11. Are there other aspects of the business, somewhat peculiar to the
industry involved, which will give the investor important clues as
to how outstanding the company may be in relation to its
competition?

12. Does the company have a short-range or long-range outlook in
regard to profits?

13. In the foreseeable future will the growth of the company require
sufficient equity financing so that the larger number of shares then
outstanding will largely cancel the existing stockholders’ benefit
from this anticipated growth?

14. Does management talk freely to investors about its affairs when
things are going well but “clam up” when troubles and
disappointments occur?

15. Does the company have a management of unquestionable
integrity?