7 Common Stock Market Mistakes I corrected to get a high return

Welcome to the short course on investment mistakes in the Indian Stock Market.

[Disclaimer]: This article is related to finance, please read the disclaimer before reading this article.

Here I am going to discuss the 7 (out of 30) most frequent and common stock market mistakes I made, and as time passed how I learned not to make those mistakes again. This was a huge learning curve and also cost me a loss of about 300,000 INR in 2018-2019. Out of 300,000, 45% was realized loss, and remaining was sold luckily at break even. It, however, didn't discourage me to invest, and in fact, I now use those mistakes as guiding light and steer away from uncalculated risk. I also consider these learnings from mistakes as a valuable resource which I would have never got without this practical knowledge. I will be using specific terms in context to the stock market but will point to relevant sources of information as and when we need more details.

Investing without knowledge and preparation has set me back by not only with the required investment capital but have also lost crucial time. We will discuss in detail how these mistakes can be avoided, how one can start with a small investment amount and still get high returns. It took me a lot of effort to learn the investment basics, how to do company research before investing, and also realize that the stock market is a complex game with no defined rules. I also have a telegram channel dedicated specifically to stock market strategies I follow: t.me/highstock

I would also assume that most investors who are reading this article would start with an initial capital of 1 lakh to 2 lakhs or up to 3 lakhs. I would assume investors with higher capital are either already experienced or have more risk-taking ability. But I am sure these tips will act as a checklist to almost all inexperienced investors and can get some idea from my mistakes. The main objective here is to at least save oneself from the bad investment even if these tips couldn't bring gain.

As we are discussing finance and investment, so before we proceed any further kindly read the disclosure above from the header.

Alright, let’s look at the list of mistakes I have committed. Please take your time, understand it, and try to soak in one point at a time. Also kindly leave a comment should you have any suggestions or feedback.

7 Common Mistakes: 

1.  Investing in high performing stocks
2.  Investing based on online search: Top stock recommendation
3.  Thinking of quick rich schemes
4.  Not investing time in financial education 
5.  Not creating a portfolio.
6.  Being emotional and letting losses grow
7.  Accept loss, reduce loss, and moving on.

 1. Investing in high performing stocks.

As an amateur investor, my first mistake was to buy stocks whose graph would look like this:

I used to be always late for the party and bought at the black line in red square, in this case around 200 INR, and soon after, the stock would start plummeting. Why? Blame it on my bad luck. Do you have a very similar experience? I am pretty sure, many of us do. As an amateur, I looked at the 1 day(D), 1 week (W), and 3 months to 6 months stock price trend, and would jump to buy the stock "with all I got". Usually, a beginner investor with no plans, or knowledge starts with 50,000 INR to 1,50,000 INR and at most 2 lac INR. Agree? How much did you start your investment journey, please share in the comment.

The question is how do I resist the temptation by seeing that growth trend. Over time this is what I first do:

• Read company growth and future plans in the news.
• I check whether they are getting new investments, a simple google search would give you the information.
• How much debt do they have? What is their debt-to-equity ratio?
• It can be found from their quarterly result along with other costs, pledges, etc.
• What is the relationship between revenue and profit?
• How does their cash-flow look?
• Are there any bulk deals recently conducted?
• Bulk deal information can be obtained from the NSE (National Security Exchange) site.

Okay, as an amateur, I admit, I used to find this very boring to go and research the above points about a company. That also shows that I was irresponsible with my money. As it goes, an irresponsible person will always invest in an irresponsible stock, hoping the money will automatically grow on its own. Very irresponsible attitude! Imagine, if a company is pinned down in debt, how will that company give you a high return in stocks!? Of course, debt is not always a bad thing, there are other factors to be considered in parallel.

But those financial details always used to confuse me. Given that I did not have any commerce or accounting knowledge. I didn't even know how to read the quarterly report or financial statements. And because of that, I started ignoring the most important knowledge to successful stock investment. YouTube video tutorials made the matter more confusing. Finally, I learned all the basics from a course from the Indian School of Business (ISB): Trading basics. If you're interested you can also take the course here.

Click here: Trading Basics Course

The above course made me knowledgeable on how to:

• Read financial statements to understand the company's performance
• Understand financial statements for building trading strategies.
• The expected return from a stock
• Understanding asset market - the concept of liquidity, different types of players, opportunity timing, etc.

The ability to understand the Company's financial statements gave me a much-needed understanding of the health of the company and also get an estimate of whether I will get a good return on my investments. This was the first step to correct my common but deadly mistakes.

Why was it important to correct this mistake, imagine if I bought the stock at around @200 INR. So if I had total investing capital of 100,000 then I could buy 500 shares. But if the stock fell just 10% from high 200 to 180. Then I immediately have an unrealized loss of 10,000 (20 INR x 500 shares) INR. This is not an actual loss, however many amateur investors would press a panic button and sell all the stocks. Hence booking an actual loss of 10,000 INR. Now your working capital has already reduced from 100,000 INR to 90,000 INR. Often people would immediately invest the remaining 90,000 INR in another stock again without any research, to quickly make some profit and recover the 10,000 loss from the previous stock. And if one continues to do the same mistake and lose money with every investment, soon: GAME OVER!

 2. Investing based on online search: Top stock recommendation

My second mistake, as I didn't take time to learn the basics of investing as discussed in the course above, I thought just an online search would give me my answer. I relied heavily on the stock recommendation found online especially from seemingly "trusted" sources like this:

If you notice, most of the similar sites tell you to buy the stock, they don't precisely say in what situations you should sell. Wow! What a sure shot way it was to lose my money. But alas! I didn't realize it at that time. I only learned them when my portfolio was reduced to half by listening to the recommendations of others. That's why, nowadays, I sometimes do read the so-called "experts" recommendation, but I am very cautious in actually implementing their recommendation. In 99% of cases, I do not follow their recommendation, and I prefer to do my own research as I am discussing in this article. Until and unless I actually get a sense of getting some good return, I won't put my money into the stock no matter how the trend looks or how lucrative the result it showed in the past couple of weeks. Earlier I used to think if I put my money in stocks I am going to get a multiple-time return, now I do not think that way anymore. I analyze and calculate the risk first. Instead of expecting the final return, I first calculate what is the chance of losing all my investment. Hence doing research on the Company's financial statements is extremely important.

I know what you're thinking, who has got the time to do research about the company right? That is why this is a very common mistake most investors do. If we want our money to grow, we have to also put in the time to find where are we putting money into. Hence it is an important skill to know how to read the Company's quarterly results and get an idea of how it is performing.

3. Thinking of quick rich schemes

Let's look into the third mistake I continuously did. You must have already observed by now, that all these mistakes followed a sequence. Mistakes 1 and 2 depleted my initial investment capital so much so that the urge to make quick money with the remaining capital became my utmost priority. People who already made mistakes 1 and 2 are very prone to doing and 90% of cases will commit mistake 3.

I quickly planned to get into day-trading and make up the lost capital and as well as the initial defeat. I planned that with 1 lakh I should be able to find a stock which would be about 20 INR, which has been showing an uptrend for the last 1-2 months (mistake 1), which should be a good bet. It would give me about 100,000/20 = 5000 shares. If that stock grows 4-5 rupees on that day, I can then quickly make 20,000 in one day. I can then research for such high growth stock every day (mistake 2). And in that month of 20-day trading, I can easily make about 20(days) * 20,000(INR) = 4 lakh INR. The calculation was simple, the scope looked possible as there were 1500+ companies listed in NSE. So picking 20 wouldn’t be that hard. And now, after a month if I can make 5 lakh, then I can simply repeat with 500,000/40 = 12,500 shares. Assuming 20 rupees stock would have become 40 INR now after a month. If those new 20 stocks made 4-5 rupees in a day. I am about to make 10 lakhs in the 2nd month. 

Do you now see how stupid such plans are, how risky they are, and a sure shot way to close the game and go home? It simply means, the Stock market is very brutal, and it doesn’t care what your long term plan is, where did you get the money from to invest, and so on. People who have been and will be making huge money in the stock market are the ones, who can stay that long in the game. 

Thankfully after doing day trading for only about 2-3 days I would consider myself extremely "lucky" that I was able to make 30,000 INR from 1 lakh investment. But I quickly also realized that I might lose it all. I want to make wealth and not quick money, hence need to stay long in the game. So rash driving could be lethal. 

But is day-trading a totally bad idea. It is not. I recently had some funds from my friends, and I really believed that Tata Motors will go up. So with a lump sum of 7.5 lakhs, I thought to buy about 4000 shares around late August 2020. The next day it grew by 10 rupees INR. I could have sold them first thing in the morning the next day and make 40,000 INR in a day. But you also see how risky it could have been. But as saying goes, sometimes calculated risk brings huge rewards. And this is what is promoted and advertised. But as an amateur investor, I would stay away from such risk. If I had made 10 lakhs from the stock market, then I might risk 1-2 lakhs in such day trading for a quick gain here and there. But I would take such a risk only after a lot of research on the market trend, company details as covered in the course above, news and so on.

 4. Not investing time in Financial Education

The most common places where I go and learn are YouTube videos. The stock market is something to be taken very seriously. Hence when it comes to health and finance, I always invest in learning from professionals or trusted institutes. Second I prefer books written on the topic by subject matter experts. Unfortunately, most of the books are written on Foreign markets which are directly not applicable in the Indian stock market. 

However, I found this book extremely helpful, even it is focused primarily on the US market. I read it thrice. It gives a solid foundation of fundamentals. The Intelligent Investor by Benjamin Graham is like a Bible for stock market investors. Also recommended by Warren Buffet himself. 

I was interested in the stock market from 2013-2014, but I didn't bother to study and research about it for the next 4 years until 2018-2019. Then I took it seriously when a few of my friends made it big. But this was when I was in the US. There are plenty of books, online courses, and study material available for investors in the US market. But, sadly, we don't have the luxury of such tutorials on the Indian stock market. Hence most of us get into the water without even knowing how to swim. But thankfully recently I took 2 courses, taught by, again, Professors from the Indian School of Business. One of them I will discuss here and the second one when we talk about my next mistake on "not creating a portfolio". If you're interested you can also take the course here.

Click here: Portfolio and Risk Management

The above course covered:

• Concepts of risk and expected return.
• How to construct financial portfolios
• Understand economic, industry, and company analyses
• How global events impact the stock market
• Portfolio management and risk concepts
• Learn concepts of modern portfolio theory.

Also one has to continuously identify what is the risk? Before investing in any stock, imagine more about what is the chance of losing the entire investment than what would be the expected return. When I was an amateur I always imagined more about the return than about the risk. As you become more experienced, thinking more about risk management will safeguard your money eventually your overall return.

The stock market, especially the Indian stock market, doesn't work or follow any rules. You can't predict the price based on previous prices and trends. Many people are trying to build a machine learning or artificial intelligence-based algorithms to predict prices and then make decisions based on that. I am myself a trained and professional data scientist, however, when it comes to money, I don't trust those machines. (chuckles). Although I have created few models myself and often refer to them just for comparison.

So without the necessary financial education, it would be highly risky to not know when to enter the market, when to hold and when to sell and get out of the investment. These courses equipped me with the necessary knowledge to decide better.

 5. Not creating a Portfolio

The first question is what is a portfolio?

Although there are different investment entities such as stocks, bonds, commodities, cash, currency(forex market), ETFs, etc. Most retail investors like you and me start with "stock". Stocks interchangeably shares e.g. TATAMOTORS, Punjab National Bank, Spicejet, etc. You can go to any stockbroker like Groww or HDFC Securities, and search by the company name and you should see the listed stock to buy or sell. 

Alright, in this article we are going to focus on only stocks and will dedicate other articles to address bonds, commodities, forex, ETFs, etc.

Most amateur investors would think why do we need to create a portfolio. A portfolio, generally means a collection of stocks, bonds, ETFs, etc. In this article, a portfolio could be buying/holding stocks from different sectors like Pharmaceuticals, Airline, and Fertilizer, etc. Can you buy and hold stocks from just one sector like Automobile, and still call it a portfolio? The answer is still yes. However, when people say "portfolio", they usually mean how diverse is your stock selection. Wait, why do we need to diversify the stock selection, what does it even mean.

Let's understand the current world situation. Due to Covid-19, whose impact is still high at the time of writing this article, several industries and sectors got severely impacted. Now, say an investor A, would have bought only Automobile related stocks and had 1000 shares each in Tata Motors, Eicher Motors, Escorts, Mahindra & Mahindra, etc, guess what? the entire industry nosedived in March 2020, and the value of the stock reduced to almost 1/2 to 1/4th or even less than the pre-covid level. On the other hand, if another investor B would have invested the same amount as A but split into automobile and pharma, guess what B would have already made 5-7 times return during the same period. As Pharma stocks are booming right now as of November 2020. But should you invest in Pharma now in November 2020, maybe still a good idea, but we should check our approach based on what we discussed in Mistakes 1,2,3, and 4. So most ace investors had a diverse portfolio right from the beginning. Again, as mentioned earlier, we should always estimate our risks. Diversification of stocks is another way to reduce stock even if we can't remove the risk altogether. 

The next question that follows is how do you diversify the portfolio: As an amateur, I had no clue. It also didn't occur to me that I need one. And that beat my list of stocks down, and alas! lost my money. Luckily soon after I stumbled upon this course "Creating a Portfolio". If you're interested you can find the course here.

Click here: Creating a Portfolio

The above course covered:

• Contribution of strategy to a portfolio in terms of risk and return
• How to modify an existing portfolio or build a new one?
• How to put weight on different strategies?
• Minimize overall portfolio risk
• What are market anomalies, timing, and mutual fund performance?
• Analyze risky and risk-free assets?
• How to set a benchmark to evaluate the performance of your portfolio? and much more.

Understanding and able to evaluate the performance of your stock is very crucial, that way you will be able to understand what should be your next course of action. Should you hold, buy more or sell, or do you include stocks from other sectors?

 6. Being emotional and letting losses grow.

One of the biggest mistakes I did was to attach myself emotionally to stock only with the hope that it will bounce back. I bought about 5000 shares in Kirloskar Electric @32 INR, just because everyone told me it's a great company and because the future is in electric car etc blah blah blah. Also Kirloskar Electric was the first stock I bought. After almost 3 years it is still trading at about 12 INR. A horrible decision, I held it for over 1.5 years. I should have done research about the company's quarterly result, about their cash flow as we discussed in the previous sections. I finally sold it for around @16 INR, lost 50% of my capital.

Emotional attachment with a stock happens mainly due to a lack of knowledge of the stock market and how the market behaves. Also not having fundamental knowledge.

 7. Accept loss, reduce loss, and moving on

This mistake might look very similar to point 6. However, it is more closely related to reducing loss or commonly called 'cap a loss'. Many inexperienced investors rather than taking quick action to cap a loss, may hold on to a losing position in the hope that the trade will eventually work out. A losing trade can tie up trading capital for a long time and may result in mounting losses and severe depletion of capital. Instead, they should smartly decide to stop the loss even further and sell the stock. Instead, book the loss, and invest that capital in a better company. Never ever let your ego or pride take over that you can't make such mistakes. Initially, I made a poor choice on this. So it's a lesson that you should learn and not commit the same mistake. Losing some money hurts more, compared to the same increment in money.

8. Stop watching stock price dance

Another activity that one should immediately avoid is "watching the stock price dance up and down". It not only has no benefit at all, but it also creates a lot of confusion in mind and there is a high chance you will commit one of the above mistakes just because of that. 

If you avoid the above 7 mistakes, then it will not force you to watch the stock price dance. Instead focus on researching the company more, see the news, etc.

In summary,

• Accept mistakes and move on in making a better decision
• Learn the fundamentals of the stock market if you want to stay longer in the game.
• Take the necessary courses or classes to learn better-investing strategies.
• I also recommend another course specific to investing strategies which have helped me a lot. Click here: Investment Strategy
• It's okay to make mistakes, we all did, but learning from the mistakes is more important.

 Additional Tips:

Thanks for reading so far. Kindly share your valuable feedback on the article, so that it can help the budding investor community.

• Always invest in increments of 10,000 INR or less. Don't invest with all your capital at once.
• This helps in reducing loss and curb mistakes.
• Don't check the share price every 2 minutes.
• Predicting the stock market's future prices is not science. Hence doing proper research about the company, quarterly results and news are better and more important.
• Always have a mindset to plan a minimum and realistic return on investment.
• The stock market never guarantees a return. Hence always keep that in mind. It is a very competitive game with no rules.
• Always take news with pinch of salt for buying as well as selling. Usually, people buy on the rumor and sell on the news. 
• Another important factor is to gradually build volume. Unless you have the volume you will never make good money.
• You can join my telegram channel for regular updates where I share my experiences in the stock market.
• Telegram channel: t.me/highstock
• I use the Groww app for most of my investment.
• If you liked the way I write, you can read more here: www.bikashdebnath.com