Sensex and Nifty are hitting record highs every other day and investors are flocking to the market. But it has often been seen that few people actually make good money. The market high doesn’t mean your portfolio value has also rallied. You need to avoid the following missteps, which could derail your wealth creation process.
Wrong interpretation of data
Do not get lured by the returns the stock market has given in the last 6-7 months, that is, after it crashed in the month of March. Don’t look at the returns a stock has generated from its low in March 2020. Let me give you an example, say a particular stock was trading at Rs 100 in the month of January, but declines to Rs 60 in March. Now, let’s say the same stock is currently trading at Rs 120, and you keep hearing on twitter or WhatsApp about how it has given 100 percent returns. But don’t get misled by this and look at the year-to-date returns, which is 20 percent and not 100 percent.
Similarly, look at the Infosys share, which was trading at Rs 736 on January 1 and fell to Rs 509 on March 19. But it is currently trading at Rs 1130. So, it has given around 50 percent year- to-date returns and not around 100 percent if you look at it from its March lows.
Data can be misleading and can backfire if misinterpreted, more so if it's a small or mid-cap stock.
Investing on the basis of past performance
Why are many retail investors buying shares of pharmaceutical companies or investing in gold, lately?
These two avenues have outperformed many other stocks and other asset classes. But what you need to know is the fact that before their recent bull run, they had a pretty long dull period of underperformance. Remember that most of the time, the sudden bull run in a particular sector may not sustain. Why? Not every pharmaceutical company is into making a COVID-19 vaccine or a drug that can cure the pandemic. So, there are no long-term gains to be made for many of these companies.
Similarly gold is always a safe-haven investment avenue, and whenever the overall economy gets back on track, the yellow metal may not outperform. So, never invest because of the past performance, especially after a sudden run, unless you are bullish about that sector and its future prospects and it is linked to your financial goals and risk profile.
Diversification is for the ignorant
The legendary investor Warren Buffett famously said that diversification is for the ignorant and for those who do not know what they are doing. In fact, you cannot create wealth by investing in multiple stocks; what you need is a concentrated stock portfolio. While this logic is true, it may not apply to you, unless you are an investor like Buffett or Rakesh Jhunjhunwala, whose main business is investing, isn’t it? You may have your other business or job to take care of, so while Buffett does not need to diversify, you need to, because you may not have an army of people monitoring your investments in terms of what and when to buy, and when to sell.
If you buy equity shares directly, then invest in 15-20 Nifty stocks. Holding five to six top sectors within the Nifty is good enough. Do SIPs in equity shares, just as you do in mutual funds, in companies such as Tata Consultancy Services (TCS), Infosys, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Hindustan Unilever, Dabur India, ITC, Reliance Industries, Bharti Airtel, HDFC Life Insurance Company, SBI Life Insurance and Bajaj Finance.
Investing in cheap/attractive stocks
People like to invest in companies whose shares are trading at low Price-Earnings ratio (P/E), as they look cheap and attractive. This is mostly done because of the lower investment amount and the greed for making quick money with the assumption that this would go up faster.
We have seen the same happen earlier with companies such as Kwality, Vakrangee or recently with Yes Bank. Retail investors assumed these companies be good buys, but what they didn’t realise was that these stocks are trading at lows for all the wrong reasons. Remember, what looks cheap and attractive today may remain cheap and become ugly, whereas there are companies with high PE such as HUL which have constantly given great returns.
How do you pick a good company then? Pick a good business with an eye on the company’s future prospects in terms of its earnings, cash flows, economic MOAT and so on.
Buy low and sell high
Buy low, sell high does not always work.
How many of you could take advantage of the market crash in March? People did not buy at that time because of fear, no cash availability or because they deployed smaller sums and so on. HDFC bank shares were available for almost Rs 1,030 just two months ago and the same is now trading at around Rs 1430, almost 40 percent higher. These shares were available for less than Rs 800 in March.
Instead, think of buying high and selling higher.
Remember: The S&P BSE Sensex was all time high when it was at 20,000 level. It will be at all time high when it touches 50,000 level also.
Do not waste time in finding out the bottoms or lows. Just stick to your asset allocation and rebalance your portfolio if needed. Always remember that as a retail investor, you do not need to do something every time the market goes up or down. Timing of the market is a futile exercise in achieving your long-term financial goals.
(The writer is a Chartered Accountant and a founder of Money Plant Consultancy)