Monday, April 10, 2017

7 Stock Buying Mistakes And How To Avoid Them



Courtesy : Investopedia

Making mistakes is part of the learning process. However, it's all too often that plain old common sense separates a successful investor from a poor one. At the same time, nearly all investors, new or experienced, have fallen astray from common sense and made a mistake or two. Being perfect may be impossible, but knowing some of common investing errors can help deter you from going down the well-traveled, yet rocky, path of losses. Here are some of the most common stock buying mistakes.

1. Using Too Much Margin


Margin is the use of borrowed money to purchase securities. Margin can help you make more money; however, it can also exaggerate your loses - a definite downside. The absolute worst thing you can do as a new investor is become carried away with what seems like free money - if you use margin and your investment doesn't go your way, you end up with a large debt obligation for nothing. Ask yourself if you would buy stocks with your credit card. Of course you wouldn't. Using margin excessively is essentially the same thing (albeit likely at a lower interest rate).Additionally, using margin requires you to monitor your positions much more closely because of the exaggerated gains and losses that accompany small movements in price. If you don't have the time or knowledge to keep a close eye on and make decisions about your positions and the positions drop, your brokerage firm will sell your stock to recover any losses you have accrued.As a new investor, use margin sparingly, if at all. Use it only if you understand all its aspects and dangers. It can force you to sell all your positions at the bottom, the point at which you should be in the market for the big turnaround.

2. Buying On Unfounded Tips.


We think everyone makes this mistake at one point or another in their investing career. You may hear your relatives or friends talking about a stock that they heard will get bought out, have killer earnings or soon release a groundbreaking new product. Even if these things are true, they do not necessarily mean that the stock truly is "the next big thing" and that you should run to the nearest phone to call your broker.Other unfounded tips come from investment professionals on TV who often tout a specific stock as though it's a must-buy, but really is nothing more than the flavor of the day. These stock tips often don't pan out and go straight down after you buy them. Remember, buying on media tips is often founded on nothing more than a speculative gamble.Now this isn't to say that you should balk at every stock tip. If one really grabs your attention, the first thing to do is consider the source. The next thing is to do your own homework. Make sure you "research, research and research" so that you know what you are buying and why. Buying a tech stock with some proprietary technology should be based on whether it's the right investment for you, not solely on what some mutual fund manager said on TV.
Next time you're tempted to buy a hot tip, don't do so until you've got all the facts and are comfortable with the company. Ideally, obtain a second opinion from other investors or unbiased financial advisors.

3. Day Trading.


If you insist on becoming an active trader, think twice before day trading. Day trading is a dangerous game and should be attempted only by the most seasoned investors. In addition to investment savvy, a successful day trader needs access to special equipment that is rarely available to the average trader. Did you know that the average day-trading workstation (with software) can cost in the range of $50,000? You'll also need a similar amount of trading money to maintain an efficient day trading strategy.The need for speed is the main reason you can't start day trading with simply the extra $5,000 in your bank account: online brokers do not have systems fast enough to service the true day trader, so quite literally the difference of pennies per share can make the difference between a profitable and losing trade. In fact, day trading is deemed such a difficult endeavor that most brokerages who offer day trading accounts require investors to take formal trading courses.Unless you have the expertise, equipment and access to speedy order execution, think twice before day trading. If you aren't particularly adept at dealing with risk and stress, there are much better options for an investor looking to build wealth.

4. Buying Stocks that Appear Cheap.


This is a very common mistake, and those who commit it do so by comparing the current share price with the 52-week high of the stock. Many people using this gauge assume that a fallen share price represents a good buy. But the fact that a company's share price happened to be 30% higher last year will not help it earn more money this year. That's why it pays to analyze why a stock has fallen.Deteriorating fundamentals, a CEO resignation and increased competition are all possible reasons for the lower stock price - but they are also provide good reasons to suspect that the stock might not increase anytime soon. A company may be worth less now for fundamental reasons. It is important always to have a critical eye since a low share price might be a false buy signal.Avoid buying stocks that simply look like a bargain. In many instances, there is a strong fundamental reason for a price decline. Do your homework and analyze a stock's outlook before you invest in it. You want to invest in companies which will experience sustained growth in the future.

5. Underestimating Your Abilities.


Some investors tend to believe they can never excel at investing because stock market success is reserved for sophisticated investors. This perception has no truth at all. While any commission-based mutual fund salesmen will probably tell you otherwise, most professional money managers don't make the grade either - the vast majority underperform the broad market. With a little time devoted to learning and research, investors can become well equipped to control their own portfolio and investing decisions - and be profitable. Remember, much of investing is sticking to common sense and rationality.
Besides having the potential to become sufficiently skillful, individual investors do not face the liquidity challenges and overhead costs large institutional investors do. Any small investor with a sound investment strategy has just as good a chance of beating the market, if not better, than the so-called investment gurus.Never underestimate your abilities or your own potential. That is, don't assume you are unable to successfully participate in the financial markets simply because you have a day job.

6. When Buying a Stock, Overlooking the "Big Picture"

For a long-term investor one of the most important - but often overlooked - things to do is qualitative analysis, or "to look at the big picture." Fund manager and author Peter Lynch once stated that he found the best investments by looking at his children's toys and the trends they would take on. Brand name is also very valuable. Think about how almost everyone in the world knows Coke; the financial value of the name alone is therefore measured in the billions of dollars. Whether it's about iPods or Big Macs, no one can argue against real life.So pouring over financial statements or attempting to identify buy and sell opportunities with complex technical analysis may work a great deal of the time, but if the world is changing against your company, sooner or later you will lose. After all, a typewriter company in the late 1980s could have outperformed any company in its industry, but once personal computers started to become commonplace, an investor in typewriters of that era would have done well to assess the bigger picture.Assessing a company from a qualitative standpoint is as important as looking at the sales and earnings. Qualitative analysis is a strategy that is one of the easiest and most effective for evaluating a potential investment.

7. Compounding Your Losses by Averaging Down.


Far too often investors fail to accept the simple fact that they are human and prone to making mistakes just as the greatest investors do. Whether you made a stock purchase in haste or one of your long-time big earners has suddenly taken a turn for the worse, the best thing you can do is accept it. The worst thing you can do is let your pride take priority over your pocketbook and hold on to a losing investment, or worse yet, buy more shares of the stock since it is much cheaper now.Remember, a company's future operating performance has nothing to do with what price you happened to buy its shares at. Anytime there is a sharp decrease in your stock's price, try to determine the reasons for the change and assess whether the company is a good investment for the future. If not, do your pocketbook a favor and move your money into a company with better prospects.Letting your pride get in the way of sound investment decisions is foolish and it can decimate your portfolio's value in a short amount of time. Remain rational and act appropriately when you are inevitably confronted with a loss on what seemed like a rosy investment.

The Bottom Line



With the stock market's penchant for producing large gains (and losses) there is no shortage of faulty advice and irrational decisions. As an individual investor, the best thing you can do to pad your portfolio for the long term, is to implement a rational investment strategy you are comfortable with and willing to stick to. If you are looking to make a big win by betting your money on your gut feelings, try the casino. Take pride in your investment decisions and in the long run, your portfolio will grow to reflect the soundness of your actions.

31 comments :

  1. Dear vp ji
    What's your views about

    1. tci express,
    2.Jenson Nicholson
    3.modern dairies
    4.patspin india
    5. Celebrity fashions

    ReplyDelete
    Replies
    1. Celebrity Fashion is the only stock I am tracking from this list . Seems some improvement in business but it is too early to comment and jump in for an average risk taker.

      Delete
  2. Can I enter to buy Jet Freight logistic? Company has good fundamental and it is in logistics. The govt focus on GST should be able to help this sector and company per se. Please share your views.

    ReplyDelete
  3. Sir, Is it a right time to accumulate LEAF??? Your suggestion is very important at this moment....

    ReplyDelete
    Replies
    1. No meaning in jumping into any stock when there is no clarity in legal matters like the one company passing through right now. At least some explanation from company on the concerned matter is needed.

      Delete
  4. Thanks for the post sirji, kindly request your opinion on Prabhat diary

    ReplyDelete
  5. Dear sir
    Sika intraplant will be a turnaround story because of airtek uk?.
    Seen your comment on mmb. Are you tracking the same?
    Also please share views on samrat pharma which is iodine and growing by past few quarters.
    Thank you.

    ReplyDelete
  6. Please provide your latest views on Krebs bio; ABFRL; and IL&FS Engineering

    ReplyDelete
  7. Dear VP is there any chance of pioneer emb coming out of bear phase and should we hold?

    ReplyDelete
  8. Hello Sir,

    Your old recommended SUNIL HITECH in may 2014 is doing good. You recommended at Rs 76 (3.8 post split and bonus) and trading now at 14. almost 250%. It got lot of road expansion orders. Do you still bullish on this stock?
    I am holding from your recommended price for the past 3 years and planning to add more.

    Thanks
    Siva

    ReplyDelete
  9. Dear
    Value pick, glad to read you after long time.
    Want to know your views on ABFRL, Satin Credit & Idfc bank can I purchase it now
    Thanks
    S.J.Patil

    ReplyDelete
    Replies
    1. Prefer to hold ABFRL and IDFC bank and review post result. Competition is increasing in micro finance sector and the scarcity premium enjoyed by the companies from this sector may disappear when more and more companies listed from this space.

      Delete
  10. Dear VP, what is happening in BSE, why, all of a sudden, yearly upper price band had been changed to lower level. is it as per policy or due to some error. actually the yealry prices bands were scheduled to be reviewed on September 2017, but yesterday i have seen in many scripts the price band had been changed .. please share your ideas

    ReplyDelete
    Replies
    1. Yes , it is very difficult to deal in BSE in recent times . Too much rules and regulations and that itself changing frequently .For an average investor it is very difficult to find and calculate the benchmarks on the basis of which stocks included in such restrictions . Really sad..

      Delete
  11. Sir
    What has happened to your facebook profile?

    Have you deleted the profile?

    ReplyDelete
    Replies
    1. Not deleted , Facebook demanding additional proofs to continue that.

      Delete
  12. Sir,What is your view on PG Foils?
    Is it a good time to enter the stock?

    ReplyDelete
    Replies
    1. Stock almost double from initially discussed level. Prefer to book partial profit and make it free of cost

      Delete
  13. Dear VP sir. I'm a newbie in the stock market. Just trying to understand the game of valuations. Your blogs have contributed tremendously to my journey. Thanks a ton. I have a question on Fiberweb. In the recent interview with Pravin Seth, the business owner, he set the guidance for the next year to be easily achieving 300 crore revenues with a profit margin of 18%. If those numbers get achieved fiberweb will easily trade at 800, considering a PE of 20. Am I missing something here?

    ReplyDelete
    Replies
    1. I think the mentioned number is bit ambitious

      Delete
  14. Sir, Your views on Skm egg from commodity cycle turn around ?

    ReplyDelete
  15. Hello Sir,
    Are you tracking Pennar Engineered & Building Systems...If so what is your opinion about it for long term investment.

    ReplyDelete
  16. Sir what's ur take on vikaswsp ..they recently issue some 5/crores shares preferential basis..guar gum price too in bull run

    ReplyDelete
    Replies
    1. Vikas WSP is a company with unique product but promoter reputation is not good due to some events happened in the past . Everything depends on whether they are ready to change or not..:)

      Delete
  17. Sir,I no longer get your post on my facebook. Have you removed me? Regards Gopikishan

    ReplyDelete

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