Updated: Sep 16, 2019
Unlike a lot of market experts and your friends who boast about their successful investments, I am here to share my learnings from the mistakes I made. Although majority of the times my decisions have yielded profits to me, but then I am not a God and I do have my fair share of learnings from my own mistakes. What I want however from sharing these mistakes is that investors reading this article don't make the same mistakes as I did. Life is too short to learn by making all the mistakes yourself, therefore learn from mistakes of others and make some mistakes unique to your weirdness and persona (kidding). However, on a serious note, being profitable in stock markets is about being right with majority of your high stakes decisions and not all the decisions. Fortunately my majority of the high stakes decisions have been right so far and I am learning from my mistakes constantly. I believe I am still young (at the age of 30 yrs) and the learnings I have will help me in the longer run.
If you wish to know who I am get a brief in our "About Us" section.
So without wasting further time in giving you background, building a story, let's directly jump into business of naming and shaming myself :p , I mean, let's start off with the learnings:
Buying a stock because it is rapidly rising daily and I don't want to miss the train: This is a proposition which kind of guarantees loss most of the times. For me I did this mistake with "mandhana industries" stock. The company behind being human brand and this happened in the early days of my investments when this company was splitting its store front business from its manufacturing business. I lost money in this because everyday when I tried to enter in this stock it used to hit upper circuit before I could enter, thus no new trades used to get accepted. I tried everything from placing the trade during market opening etc. to get this stock. My only motivation was that this stock was hitting upper circuit everyday for past 2-3 days and I was thinking if I am able to capitalise on just couple of upper circuits I would be able to make 10-15% within days. This is a classic example of greed driving an investor's behaviour, because I didn't like the stock personally, i.e. who would purchase over priced clothing from being human apart from the fan following of an ageing film-star. Also, financials were not that great. As soon as I entered this stock the upward growth stopped and it started falling towards it normal value and I started losing money. One of the reasons I couldn't ever succeed in placing trade was algorithmic trading which places bulk orders within fractions of seconds of an exchange opening and thereby beating all human counterparts. I was destined to lose money on table given greed driving my behaviour. Since then I never tried to capture such upper circuit stocks and didn't enter any stock just based on recent trend. In fact I also discovered that my investment style suits investing based on fundamentals rather than technical analysis.
Buying stocks because one of the investment whatsapp group with friends suggested to do so: This is a mistake I made with "Reliance home finance" and "Sintex plastics", both of these stocks literally ceased to exist. I got this advice on one of the group with my friends, some of them are technical analysts. This was the 1st time in my life I trusted herd advice and didn't do my own individual analysis. Result, I lost badly in both the trades. Hence, once again a learning, don't follow any individual's advice. Receiving an advice, listening/reading to it is fine but before making a decision to invest your money do your own independent analysis. I burned my hands and since then have never invested again in a stock just because someone recommended it.
Buying a stock because it gave me good returns in past: I made close to 66% profits in DHFL in its good old days and 30%+ profits in Tata Motors couple of years back. With the recent defaults in ILFS group late last year, DHFL came down by ~30% from its long term average and literally same happened with Tata Motors given it's JLR sale tumbled. Now I had profitable experience with both of these stocks in past and I had a positive bias for these 2 companies. Hence, when both of these companies came down in terms of valuations I entered them. There were at least following 4 mistakes I did here, which were: investing based on a positive bias, not doing strict and unbiased research, entering too soon in a stock which was poised to fall more, committing too much capital in a single lump-sum versus entering a falling scrip in staggered manner and last but not the least, investing a significant portion of chunk in stocks based on my conviction versus on-ground reality. The result, I had to sell my DHFL stake at close to 50% loss and I am holding Tata motors at approx. 50% loss. I am still hopeful that Tata motors over a period of 2-3 years would recover, but then I have blocked my capital for that amount of time. So I want you to learn from the above mistakes of mine and don't repeat them in your portfolios.
Buying a stock without properly understanding it's underlying business, and just because it was available cheap: I don't understand metals and sugar sector, and going by age old advice I shouldn't have entered stocks from these sectors. But then I was an over-confident investor, who was buoyed by earning close to my salary from stock market. So, I did my regular number crunching with respect to revenue growth, profit margins, P/E ratio etc. and found "Balrampur Chini mills" at an attractive valuation, same is the thing which I did with couple of metal mining sector stocks. Now somethings which I completely omitted were, these sectors are highly cyclical and revenues for these companies depend on demand and supply cycle. Given, these companies were performing well for quiet sometime I completely forgot that they are towards the end of their good cycle and now they will enter the low cycle. Generally for sugar it happens like this, in a good demand cycle, supply is lower than demand, farmers get good price for sugarcane, looking at that every farmer in the area sows sugarcane expecting good prices next year as well. Come next year and supply exceeds demand (because demand was same but supply increased manifolds) and every farmer gets screwed. Same happens at sugar mill level as well, because raw materials are available so cheap, every sugar producers price drops and profit margins come down as well due to excess supply in market. For metals this happens due to slowing down of infrastructure/auto/electrical demand, which consumes majority of metal mined. In a nut-shell, understand the underlying sector and business dynamics before picking up any stock. Pay due respect to Mr. Warren Buffett and listen to him, he is not called Oracle of Omaha without any reason. He only said not to invest in businesses you don't understand, if you still become adventurous with your money then money will become adventurous with you.
Getting over-confident with your success and think you are smarter than the street no matter what: Happens with every investor at some point in time when he/she starts feeling that they know it all and they have mastered the game. But stock markets are great leveller as well. Always diversify your investments and never keep all your eggs in a single basket (no matter how attractive the basket looks). Don't take unnecessary risks and be content with decent profits. You are always better off having good profits with low risk of failure versus exorbitant profits with high risk of failures, because failure "will" eventually happen.
The above are the learnings I had from stock market and if I made more of such mistakes I will further add them here. That being said, I generate average returns of ~22% per year across my investments, some years are much better than others and some years are just bad (like the current one :p ). Anyways, I wish you all luck (it does play an important part) and hope you learn from my mistakes :)