From mistakes we learn

BEHAVIOURAL FINANCE

Ego should not rule your investment decisions. Admitting that you were wrong is the first step towards success.

Raj Mehta, 36, was a risk-averse investor till September last year. Then, the stock market lightning hit him. Historical highs every week left him completely flustered.

While, his friends were boasting of increase in wealth every day, he was only locked-into fixed instruments and returns of a measly 6 per cent a year. Even his wife started complaining that he was being too conservative.

Then, Mehta decided enough was enough. He approached a broker recommended by his colleagues, went through the entire process of filling up a form and even managed to acquire a demat account in record three days. In less than a week, Mehta was all ready to enter the stock market.

His broker also gave him a lot of attention and tips. Within the next one month, Mehta invested over Rs 5 lakh and his money grew by over 20 per cent in a single month. Now, Mehta was more clued on to the stock market than he was in his own job.

However, in his focus to make money, he forgot one simple thing. He had taken out most of his money from his safe investments.

This meant that while earlier, his asset allocation had mostly debt instruments, now it was heavily tilted towards equity. His complete strategy was to make money and lots of it. Mehta's portfolio was no longer risk-averse, but highly risky.

Though he was advised by a few that such a skewed position could turn against him, he was unwilling to listen. His logic: I have lost too much in the years I stayed away, now I need to make up for all that loss.

Mehta, in his attempt to make up for lost time, went more aggressive in October. And why wouldn't he? All his mid-and small-cap stocks were hitting the upper circuit on a daily basis.

The year, 2008, in the initial weeks, was volatile. And he, like many others, was lecturing people that this was the period of consolidation. "Oh, by March, the Sensex would be at a minimum of 25,000 points," he told his friends.

But, as things stand today, since January 21, 2008, the markets have followed only one trend: downwards. Mehta's stocks today are down by a good 70 per cent. His gains have been completely wiped out. His capital loss: a hefty 40 per cent.

He stands undeterred though. "This stock will certainly go up and I will buy more of this stock at these levels. You know, my average costing has gone down substantially," was his response last week. Sounds great, in terms of, theory, but there is a lot of difference between averaging a blue-chip or mutual fund.

The theory falls quite flat when we are discussing the small-cap segment. A rather common story, when we look for investor-behaviour in the stock markets. Here are a few common mistakes which all investors make:

Not admitting a mistake. Ego, for one, should have no place while making investments. For instance, if you have made a lousy investment, recognise and rectify it. Sell it completely, if it is indeed a dud investment. But quitting the market entirely is not a great solution. Every market has good, average, bad and trader-driven stocks. And like everything else, good stocks survive the market mania.

Buying equity investments with short-term money: For instance, many take loans to invest, especially in IPOs. The idea is to make money on listing gains. But it does not always happen, as seen by the recent Reliance Power IPO where a lot of investors who wanted to take advantage of listing gains found themselves completely stuck.

Embarking on a financial journey without a roadmap in mind: Making investments without considering one's overall financial situation and how various components such as cash flow, liabilities, insurance (life and non-life), investments, retirement, tax and estate would fit into it.

These are a few points that you should always take into consideration while investing in the stock market. For all the Mehtas: admit your mistakes and move on.

The writer is director, My Financial Advisor