Expert advice

Jun 18, 2015,11.40 IST

Avoid unforced errors: winning mantra in amateur investing

Amit Trivedi
Karmayog Knowledge Academy

If you are active in sports from your childhood, you might have noticed something. At a very early stage, we start idolizing, while we have yet to acquire any skills. Even when one was able to just hit the ball with a racket, one was dreaming of winning a Wimbledon or a young cricket enthusiast starts to dream of becoming a Sachin Tendulkar. The coaches, on the other hand, insist that the child learns and practices the basics.

Then come the tournaments at the junior level. The young budding athletes showcase their talents on the field amidst the tournament pressure. Now when you watch these youngsters and compare them to the professional athletes, you realize a big difference between the two.

While the professional players earn their points, amateurs lose theirs.

When you watch a Roger Federer playing against Rafael Nadal, you want to see champion shots being played by both – there are aces, cross-court shots, rallies. You will be able to count unforced errors on your fingertips. On the other hand, in the amateur play, the player making the least unforced errors often wins the match.

I remember my early days playing cricket. We could actually steal a run simply by playing the shot in front of certain players. You could rely on their wide throws. However, in the international matches, most batsmen do not dare take a chance in front of most of the fielders.

A big difference between amateur and professionals is that while the latter wins based on superior skills, the former can stay in the play by avoiding mistakes.

Welcome to the world of investing. One has come across many amateurs, part-time investors dreaming to become Warren Buffet or John Templeton. The game has to be played very differently. While a great fund manager strives to beat the others, most of us would be better off if we do not lose our money.

And there are many ways and temptations if we want to lose money. Opportunities to lose abound. How do we safeguard our money is a big question. However, the answer is quite simple. If we know how we can lose money, we can try and avoid those possibilities. If we cannot avoid all the possibilities, can we reduce the potential impact of such negative events?

What kind of mistakes do investors make? We have, over the years, observed some common investment mistakes investors have made, which have resulted into losses later:

1. Some people invest in something that one does not know. So often, investors ask an expert’s opinion after one has invested the money. It is always good to take a second opinion or review the investments periodically. However, in both the cases, one must have done proper assessment before investing the money. There have been cases when the investor has bought some stocks only on the basis of a tip. One did not know whether the company is worth investing in or whether the person who gave the tip is really knowledgeable.

2. Some assume that all fixed income products are guaranteed return products. In fact, there are some products, which are safe to invest in. However, such safe investments offer very low return. In order to earn higher than what these safe products offer, one must take some risk. Presence of risk means absence of guarantee.

3. Sometimes investors invest money simply because they have seen a mutual fund scheme’s advertisement highlighting very good short-term performance. Apart from the advertisement, the source of such information could be various financial media and certain websites. It is important to remember the disclaimer in all mutual fund literature, “Past performance may or may not be sustained in future.” This also applies in case of physical assets like real estate and gold. We have seen many investors chasing these assets after the same have appreciated a lot. In the end, one ends up holding an asset, whose market price has come down.

4. In the last few years, many have lost money in fraudulent schemes. There have been schemes offering very high returns and people have got lured into these. In the end, even the principal investment was also lost. Needless to say, no (or negligible) income was earned, too.

We can go on and on with the examples. It is important to realize that an amateur is likely to make more mistakes.

Know whether you are an amateur or a professional. Learning to be professional is good only if you are really going to spend the time learning and later using the skills acquired. Else, it might be better to know your own limitations and play your game accordingly.

Understand various investment risks and potential fraud situations. Also please understand that any investment offering high returns carries high risk – it does not matter whether you understand the risk or not.

Play the game, but reduce the number of unforced errors. Take professional help, if you need. Remember, even the professionals hire coaches.

The views expressed are his personal views.

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