Ram got a call from his stockbroker one morning urging him to buy shares of company A. He wasn’t given a reason except that the share would double. Ram fell prey to greed and bought the stock, only to find the share prices collapse in a few days. He called up his friendly broker, who suggests selling the shares, and buying shares of company B. Seeing the reluctance of Ram, the broker suggested he bought more of A, to bring down average cost of ownership. Ram complied with the advice, only to find the share price falling further. In exasperation he sold all booking losses, and swore never to turn to the stock market again.
Sounds familiar? Retail investors, should remember that nothing comes free and if someone gives you free advice, always suspect the motive. The market has seen unprecedented growth, creating enormous wealth for investors. Small investors mostly did not participate in the early part of the rally driven mainly by foreign investors, but came in later.
This unprecedented bull run has turned small investors into day traders; greed often clouds judgment, and looking for daily gain through borrowed capital, where a small fraction, usually a fifth of the total position is paid, has made the stock market speculative. One must understand that to gain over a longer term one needs serious discipline, patience and conviction about one’s judgment. Some of the common mistakes investors make are staying invested with losses, or booking small profits early. Investment losses also occur if the initial choice of investment is wrong. Averaging a loss making investment when the investment case is flawed is also wrong. Most of us do not like to book losses. Similarly, the fear of losing profit often makes us sell early, thus leaving the potential profit , if one is patient.
Know your stock
Everyone understands that if India grows, as is evident all around us, we need infrastructure, so capital goods will be required, engineering sector will do well, and road builders will flourish. If we need to build so many homes, the real estate sector will do well. So, investing in these sectors and holding long-term will work wonders. When we buy a plasma TV, we go to four shops and check out ten models, do the same for getting the company right. Investors need to know the company they are investing. Like in any rally, there will be setbacks, as it is the law of nature that periodic corrections are inevitable for a stronger equity markets. Financial markets are today increasingly linked to global markets and fund flows. Any correction or potential problem in markets abroad has linkages in the domestic market, leading to market corrections.
Retail investors need to learn to live with volatility at this level of the market. One must understand that a two per cent intra-day swing at 19,000 points of Sensex means about 850 points, against 300 points when the Sensex was at 6,000 points. Volatility like this can be damaging to small investors, especially if one is leveraged and indulge largely in day trading. Most of the retail investors are taking a very short-term view, and use derivative market, which is settled mostly within a month. Retail investors should remain investors and not become traders, to ride through the volatile environment. Leveraged derivative and cash trades would inevitably call for margins and mark-to-market losses, obligation if not fulfilled, would lead to losses for retail investors.
The author is the President-Equity, Religare Securities