My three biggest investment mistakes

I have a recurring quarterly google calendar reminder to look at my personal finances and take action where required. This means checking whether I have too much or too little liquidity, making investment allocation decisions around parking money in liquid funds versus deploying in the stock market and finally, a check on the components of my stock portfolio and whether it needs any tinkering.

With not much “tinkering” to do the last time, I spent time taking stock of my portfolio performance starting back in 2006. I focused on what went well and also went spectacularly wrong. Thankfully I had more of the former, but a not inconsequential number of “losers” whose impact on my overall portfolio was mitigated by the fact that they were from my early years of stock market investing. Not surprisingly, on reflection, the reasons for the bad investments bubble up into a few broad causes.

So, my three biggest “what was I thinking!” investment mistakes over the years in ascending order of importance 

(Note each category has several examples, more than I’d prefer, but I’ve used one real example for each as illustration):

3. Going contrarian on price alone

One of the early catch-phrases I cottoned on to as an investor was “Buy low, Sell high”. So I’d be delighted to see a stock price decline so I could buy more and bring down my average cost. This might sound suspiciously like what legendary value investors say, except I was too influenced by the price decline to wonder maybe it was actually justified by the company’s fundamentals. Even when doubts arose, I’d rationalize by thinking to myself, things couldn’t be that bad.

Buying more at regular intervals was not a bad idea, in fact it helped bring the average cost down but then paying any amount of money for companies drowning in debt and seeing poor cash flows is too much.

My ‘going contrarian on price’ example:

The Calm Investor | Biggest investment mistakes

I first bought BGR Energy in April 2011 for ₹510 after which it promptly fell 65% over the next 9 months to around ₹170 based on negative outlook for capital goods companies due to slowing capital expenditure. Not deterred by the fall, I started buying more in SIPs over the next few months, in spite of the company’s high leverage. The stock dived further when the promoter B.G.Raghupathy died in July 2013. I bought more over the next few months adding to my positions expecting a turnaround in their order books which didn’t happen before finally selling the stock as part of a portfolio clean up.

Lesson learnt:

2. Not selling losers

The largest category in terms of number of my investment mistakes belong here. The typical sequence would be getting interested in a company based on a conversation with someone in the industry or a random newspaper report, followed by some (often superficial in hindsight) financial analysis followed by some conviction-filled buying. But that’s typically not the problem. Mistakes will be made when buying companies. It’s when the stock then drops like a stone or grinds down over a period of months, there isn’t enough conviction to buy more but at the same time, that all-too-familiar bias of loss aversion doesn’t allow selling the stock to take the loss. The buying price acts as a floor in our mind and selling below the floor almost seems physically painful. So you keep holding, in the hope that it takes off again enough to recover your loss.

My ‘not selling losers’ example:

The Calm Investor | Biggest investment mistakes

As a new investor, I was a big consumer of the “India growth story” but finding all large cap stocks to be too expensive, I got interested in this mid-cap mining and construction equipment manufacturer. After making a lumpsum investment in Dec 2007 at ₹660, the stock fell as part of a market decline to ₹270 before the financial crisis with the Lehmann collapse hit and fell to the ₹120’s. The broad market recovery in early 2009 brought it back up to ₹over 300. With the outlook on capital expenditure muted, it should have been a good time to exit, except the 60% loss made it difficult and I held on for another year before exiting.

Lesson learnt:

  • Irrespective of how good a company / stock is, your purchase price determines your potential returns
  • Once proven that your purchase to be too high, sell and take the one-time loss rather than add to the opportunity loss

 3. Selling winners too early / Not buying more

Some of my biggest “losses” are not losses at all but returns missed due to impatience. They happened on stocks that made me money when I sold them to make the gains “real”. The good companies then proceeded to rise significantly even as I looked for other stocks. Finding good companies and their stocks at fair prices is hard enough and selling your winners is one of the biggest investment mistakes I made more times than I’d have liked to. This propensity to sell a stock that has risen is the other side of the same bias that makes us hold on to losers.

Another side-effect I noticed in my early investment behaviour was the aversion to buy more of a great stock just because it has risen significantly from my purchase price. The negative impact on absolute returns of a stock added at higher prices was the single biggest deterrent to adding more of a great stock.

My “selling winners early” example:

The Calm Investor | Biggest Investment Mistakes

Identified Aurobindo Pharma as a mid-cap pharma stock at modest valuations in August 2011, bought consistently over a few months till the allocated amount was deployed. The stock rose, not suddenly, but consistently over the next almost 2 years at which point bought a little more, then watched it appreciate sharply over the next few months. An relative look at valuations told me the stock was now significantly more expensive, so sold it for what I considered a good annual return, only to watch it appreciate by over 300% in the next year.

Lesson learnt:

  • Don’t sell in a hurry, in fact, don’t sell until you have a more promising alternate investment lined up
  • Buy more of your winners (not your losers), if the original story gets better, even if it is at higher prices than when you first bought

Bonus investing mistake: Technical Analysis & Leverage

Bonus because this was a short-lived experiment that I was thankfully was able to shut down before it was able to wreak havoc.

Back when I was exploring the various schools of thought on stock investing / trading, I (very) briefly flirted with trading. The idea of technical analysis and having clear “buy” and “sell” signals based on past stock movements and imaginatively named patterns was appealing. However, 4 and 5% moves weren’t going to provide much joy with the paltry amounts I had at my disposal. Enter “Futures“,  which give you the ability to take a position on average 5x your invested amount by way of leverage.

I think I got more going my way than against but the idea of being able to foresee short-term market movements seemed about as credible as astrology. The potential disastrous downside quickly became apparent, thankfully, not at much cost.

Technical Analysis
Source: dilbert.com

Lesson (quickly) learnt:

  • Leveraged positions betting on short-term price movements are like a game of Russian Roulette. There are no comebacks from going wrong even if the chances are 1 in 6. No leverage (borrowing to invest) and no betting on short-term price moves

Revisiting my poor investment decisions only served to reinforce the idea that successful investing is more about being able to curb your inherent biases and impulses than about brilliant stock-picking, which forms one of the basic principles on which this site operates:

The Calm Investor | What investment results depend on

 

Have you ever wondered what type of investing mistakes you tend to make? Drop me a line about what you’ve observed causes your poor decisions. Thanks for reading!

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