Following Warren Buffet, and other mistakes to avoid while investing in stock markets

It's easy to get carried away by numbers and record highs. Here are some key mistakes to avoid while investing in the stock market especially when it's too tempting

Updated: Jun 24, 2021 07:52:10 PM UTC
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“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” —Paul Samuelson, an American economist, and Nobel Memorial prize awardee

Investing in the stock market is a serious affair and a long-term game. But still investors tend to succumb to their emotions every time the BSE Sensex reaches a new high. There have been many firsts for the stock exchange. When it hit 1,000 for the first time, it was an all-time high, and the story and excitement continues with every new record, whether it's 10,000, 20,000, 40,000 or 50,000. One day, Sensex will cross the 100,000 mark and then 500,000. Yes, of course, we don't know when that will happen. But some basic rules of investing don't change no matter what record the markets have broken—the important thing to remember is that market high is not a destination, it's a journey, a journey towards wealth creation.

And for this journey to be smooth and fruitful, I am going to share some tips before you decide to invest in the stock market while it rides the bull.

Avoid fear of missing out, i.e., FOMO
Many people could not participate in the stock market rally in the recent past and are suffering from FOMO. Now, there is a strong urge to invest before they lose more. But fear of missing out on some perceived gains shouldn't be the guiding principle of investing. It's best to avoid FOMO because it will lead to irrational money decisions.

The market sees what we can’t; it is smarter than us
The market always sees things we cannot, it is a forward-looking machine. It has probably discounted the third or even the fourth Covid-19 wave. There is a huge difference between the economy and market's performance but that is how it works.

In the end, the market keeps proving everyone wrong and that is why you need to avoid thinking too much about it and shift focus to your asset allocation and risk profile. In a quest to beat the market, you may end up getting beaten, so control the controllable, i.e., your behavior and hence, your money.

Don’t invest in meme stocks or trending stocks
Have you heard about the AMC entertainment and GameStop stocks listed in the US market and how their price skyrocketed without strong fundamentals in place? It was a pure-play of operators and the community.

Similarly, people invest in a lot of meme stocks or trending stocks in India as well on the basis of news for a quick gain. Know the fact that most of the time when a stock is trending, it is trending for the wrong reasons. It's important to remember that you are investing in the businesses and not stocks. Find good businesses, and avoid investing in the meme and penny stocks. Understand your risk profile, financial goals, and do thorough research before you pick any stock, the way you do it before buying a car or a house.

Don’t follow Warren Buffett
Warren Buffett is a legendary investor and there is nothing wrong with his investing advice, but the issue lies in following any advice blindly without first understanding your own risk profile. Are you aware of his famous quote about diversification—he says, diversification is for the ignorant—what it means is that those who know how to select the right stocks, would be better off by investing only in a few stocks rather than multiple stocks across sectors. But that doesn’t work for a retail investor. In fact, according to him, a retail investor should invest in the index funds and follow a proper asset allocation.

But people wrongly interpret his diversification advice and restrict their stock investments to three or four stocks only, which puts them at a huge risk of having a concentrated portfolio, a risk you cannot take unless you are Warren Buffet. So always diversify, unless you have the time, money, and the expertise to select stocks like him.

Remember that his investing is different from yours as he can practically buy out the entire company. So, you need to diversify and have a good asset allocation by spreading your investments not only into good quality stocks but also in real estate, mutual funds, stocks, gold, provident fund, Public Provident Fund, National Pension Scheme, and more—depending on your risk profile, financial and aspirational goals, and the timelines to achieve them.

Don’t chase the price
Stop finding the top or bottom [price] of the stock. The key thing to do is to find the right stock at the right price, so focus on what is important. Do not pay too much attention to the price because you need to see the value more than the price. It is famously said that 'price is what you pay and value is what you get'.

So, don't look at the price in the three-six months timeframe and instead, look at the business and what it can do in the next three to five years. Don’t bother about what RBI is going to do tomorrow or how the market will react tomorrow. It's better to focus on the long-term.

Create your fun-burn account
There are many investors who get lured into the idea of trading to make a quick buck. The temptation is higher while working from home as people find more time to devote to tracking the stocks on the daily.

It's risky to play with your hard-earned money, but if you're too tempted, then fix an amount, ideally, about two-five percent of your savings that you may afford to lose, and play your hand. I call it fun-burn money.

Spread your investments
Never invest in one go, and especially at the current market level. So unless there is a good correction, always spread your investments into tranches. For example, if you have Rs 10 lakh to invest, then divide that into five or six months and invest accordingly.

The writer is a personal finance expert, a Chartered Accountant by Profession and founder of NRP Capitals (formerly known as Money Plant Consultancy)

The thoughts and opinions shared here are of the author.

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