We often hear professional money managers, investment bankers say: Indian stock Markets, on an average, generate a return of 15% annually, over the long term.
It almost sounds like just by opening a demat and a trading account your money will grow at 15% per annum.
I don't think so.
Where Is My 15%?
Imagine if you had invested in these 4 stocks in the past 5 years.
Forget annual returns, these companies haven't even generated a total 5Yr. return of more than 15%.
Company 5Yr Return BSE Sensex 5Yr. Return
Ambuja Cements Ltd. 13.03% 70.7%
Tata Motors Ltd. -56.2% 70.7%
PTC India Ltd. 11.7% 70.7%
Lupin Ltd. -24% 70.7%
Source: Google Fin.
These Examples Simply Highlight The Importance Of Stock Picking.
There is no such thing as making easy money when it comes to investing in individual stocks. It will be like mastering all the swim strokes on the very first day.
Investing is Simple. If you follow a few certain dos and don'ts. Develop a discipline and spend some time doing research.
Let's look at it from a different prospective. What should an investor not do when it comes to making money from stocks.
Aim For Short Term Goals – Making A Quick Buck By Trading Frequently
Trading, buying and selling a stock frequently is literally like setting yourself up to lose. It is an important purchase and should be treated like one. You don't change your furniture every month. Buy stocks whose businesses you truly believe in. Buy them cheap and wait for the turnaround patiently. If the fundamentals are strong, the stock price will reflect that soon enough.
Moreover, trading frequently increases your costs. The brokerage and the short-term capital gains tax (15%) eat up into your profits at a very fast pace. When looking at stocks, keep in mind, costs are as important as the return expectations.
Not Knowing When To Quit – Selling Too Soon Or Too Late?
Don't sell just because the price has gone up or down. But give it some serious thought.
You know the fundamentals of the company are strong. You have done your research before buying it.
Imagine having invested in Biocon @156 in 2015. The stock didn't perform well until 2016. And you sold thinking it hasn't given any returns as such by March2016. It had doubled by the end of 2016 to Rs.310 and is now trading at Rs.610.
Stock price movements don't always indicate the true picture of the fundamentals of the company. If you think, something is seriously wrong, look into the issue, understand the crux behind the movement in price. Don't get swayed by the quarterly results.
Ignoring The Underlying Business
Don't buy a stock unless you understand the business inside out. Taking the time investigating before buy a stock will help you avoid the biggest mistakes.
Imagine having invested in Tata motors. It belongs to one of the oldest business houses of the country. We are sold on the India consumption story. The company's heavy commercial vehicle business is something we cannot miss. Everywhere you go you see a Tata Motor trucks carrying goods. But what you're missing is that more than 70% of the company's profits comes from its international business since they acquired JLR. This information is readily available to every individual. it is mentioned in the annual report published and posted by the company on their website.
Overlook The Underlying Value Of The Company
Finding a good company is like winning only half the battle. The other half relies on buying it at the right price.
We all understand that Nestle is one of the top companies in its sector. But whoever believes that its worth buying at (P/E ratio) 65 times of its earnings will have a tough time making money in the stock. Buy when you feel you can build a margin of safety. For instance, buy it at 30 times the earnings so if it doesn't perform as expected you have a built-in cushion. Yes, the stock will surely grow at a normal pace but you're better off investing in a stock where you find deep value.
I can honestly, say I have made all these mistakes as a new investor. A beginner. And you might also. But keep a few things in mind. Do your homework, understand the business in and out and don't get swayed by popular opinion. If you develop a basic framework for investing and stick to it you're most likely to do well and probably not repeat the mistakes I made.