Equity Investor - 5 Biggest Mistakes I should Have Avoided

Being an Equity Investor is the riskiest job in this world. This thought came to my mind while going through a post on riskiest jobs in the world :). Jokes apart, i was forced to think some of the biggest mistakes i made in past as an equity investor. I can pat my back for double-digit returns, but if i would have avoided mistakes as an Equity Investor, then i could have aimed for doubling the returns.

Life is full of ifs and buts. No one intentionally takes wrong decisions in life. At the time of decision making, the decision appears right and profitable only. Every mistake is a learning opportunity for Equity Investor. Someone rightly said that not making a mistake is the biggest mistake of life. It stops your learning curve in the life. Currently, my equity investment is NIL as i quit equity due to volatility. Therefore, it is the right time to introspect what went wrong in past. After introspection, i thought of sharing my mistakes as an Equity Investor with my readers. Hope it will be a good read for future investment.

Equity Investor – 5 Biggest Mistakes I should Have Avoided

1. The inclusion of a Stock in Key Indices: As an equity investor, I made certain investment decisions based on the inclusion of a stock in the main indices like Nifty, Sensex, MSCI, etc. The best examples are Adani Ports, Indiabulls Housing Finance, Glenmark Pharma, etc. After losing a good amount in these stocks, my learning as an equity investor is to stay away from such stocks. There is always an initial euphoria and stock rally but in the long run, it is a loss-making investment. When i investigated, i found that stocks that are shortlisted for inclusion in key indices already had a good run. Mostly, they are included in indices when the fatigue level is at its peak.

The “Paid” news play a critical role in initial euphoria/rally. In fact, this point is EXIT trigger for existing investors i.e. who are invested from quite some time. Operators also find it as an excellent opportunity to book profits and exit. As i keep highlighting in my posts on the stock market that retail investors are the last one to know about the news. The big fishes know in advance and take a position at the beginning of the rally. To summarize, avoid stock to be included in key indices.

2. Trusted Stock Prospects more than Macroeconomic data: You will not believe that i identified some multi-bagger stocks like SpiceJet. I bought SpiceJet at Rs 18 and sold at Rs 20. Though i firmly believe in macroeconomic data but was influenced by weak stock prospects. The SpiceJet was in heavy losses and was about to shut its operations. At the same time, the crude oil prices were on the consistent downfall. As an equity investor, i thought about this point before exit. Reason being, in India the jet fuel price is a significant cost of operation. It was the key reason for the loss of airline companies when international oil prices were on the rise.

Today, SpiceJet is trading at Rs 72 and as an equity investor, i regret my decision of not believing in macroeconomic data. Another example is a slump in commodity prices. Equity investor failed to identify the trend and booked huge losses in commodity stocks.

3. Don’t listen to Analysts: I observed that out of 10 times the analysts go wrong eight times. Few months back there was a universal consensus that Sensex will be 30000 at the end of 2015. Alas, it is way below hovering around 26000. The stock market is too complicated to understand for an Equity Investor. If you are taking the support of analysts shoulder then sorry you are at wrong place. As i always highlight in my posts that an Equity Investor should never listen to analysts. I don’t want to comment further.

4. Ignored FII selling: A definite trend that i observed is that consistent FII selling means time to exit. Though media keep highlight that DII’s are buying. The fact of the matter is that DII’s cannot support Indian Stock Market. Also, as an Equity Investor, you should be conscious that by FII selling i mean out of last 30 days, net selling for 20 days. FII selling doesn’t means panic or consistent selling else market will collapse. It is swift and gradual. As an Equity Investor, i ignored this important signal of time to EXIT.

Similarly, the entry point or BUY signal is FII buying. Besides handful factors, an Equity Investor does not have much information about the nitty gritty of the stock market. Therefore, it is imp to keep track of these definite signals for entry and exit.

5. Invested in Broader Market to hedge risk: The days of the broad-based market rally are over. Initially, i followed this strategy to hedge my risk, but it will not take you anywhere. There is a thumb rule that risk is directly proportional to returns. If you avoid risk, then debt investments are best options. The concept of risk hedging by investing in broader market may not deliver desired results. You can beat the returns of debt through controlled equity exposure as i discussed in my post, Risk-Free Equity Investment.

Words of Wisdom: The negative return of NIFTY and Sensex has broken all the myths. As a result, going forward the mutual fund returns will be muted. It will be difficult for a fund manager to beat the returns of the stock market. In future, the best returns will be delivered by following a pick and choose strategy. This strategy will be based on macroeconomic factors. Analysis of macroeconomic factors will zero in the sectors to invest. After finalizing sectors, i will cherry pick the stocks to invest. Hope this strategy will work. Mutual fund investors should focus on the stock holding of the scheme. The schemes with a heavy focus on stocks supported by macroeconomic data will perform better in future.

As an equity investor, i will limit my stock holding to maximum five stocks. During introspection, i observed that if i would have followed this strategy in past, then my returns would have been in three digits. Anyways there is NO Point beating the bush. I have learned from my past mistakes and getting ready for next innings in stock market.