t is said that older people are wiser. Simply because they have committed so many mistakes that they cannot help but learn from them.
Well, I made some rather silly mistakes in the stock market. So, loaded with plenty of wisdom, I now address the young investors in their 20s, who are about to take the plunge.
Hopefully you will learn from my experience and not commit the same blunders.
This is a part of our ongoing series of readers writing in with their personal experiences at investing. Do you have any experience you would like to share? We would love to hear from you.
The day I was a millionaire seven times over!
I was always a serious stock market player.
By 1998, I had invested sufficiently for my investments to be valued at around Rs 18 lakh (Rs 1.8 million).
As the market began climbing, I remember looking at my portfolio of stocks and happily noting they were worth around Rs 75 lakh (Rs 7.5 million) in March 2000. You read that right!
Of course, credit must be given to infotech stocks. I had invested Rs 3,00,000 in them, and it was now worth Rs 50 lakh (Rs 5 million).
So what did I do?
Well, if I was logical, I would have sold my shares and happily watched my bank balance shoot up.
But I was anything but logical. That is what the stock market does to you!
While my wife and family were thrilled about the sudden increase in my net worth, they also seemed to be more sensible than I was. They all told me to sell.
"If you don't want to sell all of it, at least sell a few of them," was the best advice I got.
Unfortunately, I lingered and dithered.
Alas! Within a month, the market began to go downhill and did so for the next few years.
Rs 75 lakh (Rs 7.5 million) dwindled to Rs 15 lakh (Rs 1.5 million).
All because I could not bring myself to sell at the right time.
History teaches us nothing
I am a veteran when it comes to holding on to stocks.
I made a similar blunder during the 1992 boom. I could have sold my stocks at that time; instead, I held on and the prices soon tumbled.
So I smartened up and began investing a lot of time studying investment strategies. I benefited a lot.
I prided myself on being a savvy investor and made some excellent picks from time to time and reaped big returns.
Yet, I again repeated my 1992 mistake in 2000!
I like to call it the Abhimanyu Syndrome.
Remember Arjuna's son Abhimanyu of Mahabharata fame?
He successfully took on all the Kauravas in the final battle and even entered the core of the chakravyuha in the course of the fight. He perished because, though he knew how to enter the chakravyuha, he did not know how to come out.
Let me apply the same analogy to the stock market. It is somewhat easy to make paper profits. Your share is worth Rs 10 today and Rs 100 tomorrow, so the value of your investments shoot up. And, yes, you feel great.
But it is another thing to actually sell the shares and stay happy with the profits.
So now, dear young readers who are just entering the stock market, learn from my experience. Let me caution you against certain dangers.
1. It is not all about winning. Whenever you meet people who brag about the money they have made in the market, ask them about their losses too.
I had put around Rs 3,00,000 to 4,00,000 (which I had saved for my retirement) in some companies which turned out to be fly-by-night operators. I don't need to tell you I lost it all.
Stocks are risky. Be prepared to incur losses too.
2. Try and steer clear of the gambling mentality. If a gambler wins a huge amount, he will not be satisfied. He will return and play with the same money in the hope of making more.
If I had taken at least half of my earnings when it touched Rs 75 lakh and put it in some safer investments, I would not have been as disappointed as I am today.
When you make a profit, do not reinvest the entire amount in shares. Put some of the money aside in safer instruments. Should you make a loss in the market this time, you will not lose all your earlier profits.
3. Try and keep a psychological balance. Once greed gets the better of you, you are totally susceptible to making losses.
You will end up buying shares of worthless companies simply because you think you have heard a 'good tip'. Worse still, even if you are making a loss, you may not have the common sense to swallow your pride and sell before the prices drop even more and your losses increase.
4. Don't think of yourself as an expert in timing the market. You will just wait and wait for the market to go higher and higher. That can be dangerous. Don't get too swayed by the media hype. Be rational.
Warren Buffet drove this point home when he drew an analogy to a partygoer who knows he has to leave the party at midnight (yes, like Cinderella). The problem is he thinks he is smart enough to know when the time arrives even though the hands on the clock are missing.
Peter Lynch said the same thing too. The bear phase (when market sentiment begins to dip and the prices of the stocks start going downhill) will never announce itself. Everything becomes apparent in hindsight.
5. When the prices of your stocks rise substantially, sell. Don't hold back. You will give yourself excuses like you do not know what to do with the windfall. If you wait longer, you may not get any windfall. Which is worse -- not getting the windfall or not knowing what to do with it?
It is better to emerge as a non-glamorous successful player in the long run than risk trying to be a market punter.
This is a part of our ongoing series of readers writing in with their personal experiences at investing. Do you have any experience you would like to share? We would love to hear from you.
