There are many reasons for losing money in direct equity investing, and any expert can give you ten reasons – and some of the reasons will be common.
Here are my 12 reasons:
Direct Investing is a science – and it has to be learnt. Doctors who understand that medicine has to be learnt for 10 years think they can watch some television channels and learn investing. Amusing, and terribly wrong.
Investing is a full time job! When you are an analyst, broker, or a fund manager you realise how difficult it is to build a portfolio. As a doctor you understand that it takes 25 years to build a good practice, they need to understand that it takes 25 years to build a good equity or investment portfolio.
Not having a plan – at least in the mind you should know why you are buying a share or creating a portfolio. When you write it down, you make some rules – and share it with your family.
Not knowing whether an investment is for the short term or for the long term. This can also be seen as not knowing whether the transaction that they are doing is a Trading call or an Investment call!
Not being able to think for themselves! Copying what others are doing is an amazing route to failure. Even legendary investors like late Rakesh Jhunjhunwala must have bought at least 100 shares -100 companies –however he made most of his money in just 10 shares. If you missed that 10, and you got in and out at the wrong time, you missed the bus, totally.
Holding on to bad buys for a very long time – so the money stays in a bad share for too long and missing the opportunity to use that money for some better shares.
Thinking that they have to earn profits from the SAME shares where they LOST money! This sounds ridiculous, but ask them and many will confirm!
Doing Futures and Options with no clue why they are doing it.
Listening to their greedy relationship managers who make them churn their portfolio. These people don’t consider the impact of transaction cost or tax costs in doing too many transactions.
Not understanding one’s limitations. How can a civil engineer or a doctor or a mining engineer understand balance sheets unless they go through a training? Such people are much better off investing through a mutual fund instead of trying to dabble in direct equities. There are so many other things to know – behavioural finance, business cycles, promoter integrity, etc.
Improper asset allocation – when you have too little money in equities, there is no impact on your total portfolio. However, if you have too much money in equity and don’t have the stomach to sit tight during tough times, you will panic and lose money.
Spending too much on Macros –and not doing enough research on Micros – seeing the fundamentals of the company in which money is to be invested.
PV Subramanyam
writes at www.subramoney.com and has authored the best seller ‘Retire Rich - Invest C40 a day’