Mistakes to avoid while starting to invest

5-7 minutes read can save your investing journey going backwards by few years. You may end up saving a lot of time and loss of capital.

7/30/20237 min read

This 5-7 minutes read can save your investing journey going backwards by few years. You may end up saving a lot of time and loss of capital.
Investing is a journey of long term compounding, if we can save ourselves from some pitfalls which new people are prone to, we can not only save our capital, our journey of compounding gets accelerated faster than most others.

We don't have to be smarter than the rest, we have to be more disciplined than the rest. -Warren Buffet

Its more important to ensure survival under negative outcomes than it is to guarantee maximum returns under favorable ones. - Howard Marks

Large amounts of money aren't made buying what everybody likes- they're made by buying what everybody underestimates.- Howard Marks

Why to avoid midcaps and smallcap stocks while starting out?

At least for first 1-2 years until you understand and learn more about the operations/ volatility of the stock market, better to avoid mid/smallcaps. Largecaps are top 100 companies in terms of market capitalization. These are considered more stable companies with less volatility and less drawdowns during market corrections, hence gives you peace of mind during market downturns. On the other hand, mid/smallcaps are very volatile, and prices of some stocks correct > 20% in 1 week if certain triggers are there. Things may turn out bad even before you are able to react. So 1 week out of market, not observing developments of your mid/smallcaps may wipe out your gains. While this is not a concern if underlying quality of stocks are good, but most certainly in the initial days, most of us wouldn't be able to spot quality stocks from the rest. Hence this statement.

Avoid chasing microcap multibaggers

Social media is filled with microcap multibagger ideas. While those ideas may work for experts who dabble in them day-in day-out, it may not work for you. Why?
Microcaps are very risky -smaller companies than smallcaps and if things turn out bad, your entire capital may be at risk. First better to learn the easier steps- largecaps, then understanding your risk profile, importance of portfolio position sizing in risk management. Once you have done all this, then midcaps, then smallcaps, and finally when you are confident about your stock picking ability, you may experiment with a very small portion of your capital into microcaps, the amount you won't regret losing.

Always understand the risk first, and focus on compounding > 20% CAGR in the long term on you portfolio ( which 95% (don't recall the exact figures ) of the investors fail to do) . So multibagger chasing can be done once you are able to beat 95% investors first. Makes sense?

If you lose initial capital in first few years,
- it takes your compounding journey backwards by some more years

5-6YEARS OF CONSISTENT COMPOUNDING DAMAGED, at least

- you may not be confident to put significant capital in stock market in future
- you may leave stock market

In all cases, you miss this long journey just giving in to short term temptations.

Why to avoid random Youtubers/Telegram groups for stock recommendations just from start?

Unless we have some base knowledge, we won't be able to tell the difference between a good youtuber and an average one , so everyone would look good to us. So acquiring the base knowledge is important first- which can be done by treasure trove available in the books written by greatest investors in the world who has practised the discipline for years. Also there are numerous interviews of these greats in youtube.

Learning first from at least 2-3 good investing books by renowned investors will help you guide further in the right direction in the journey of stock market.

After that, once you start practising investing, you yourself will be able to decide which source to follow for further learning. Once you get deeper into this, you will soon discover most of the channels are not worth watching -saving your precious time. Plus 30 minutes of reading investing book instead of watching video 30 minutes- absorption of knowledge is much more, if we are fast paced self- learners. Even if we are not, all of us can develop this skill as we start reading more and more. Habit of reading is very rewarding.

"In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the time -- none, zero. You'd be amazed at how much Warren reads--and at how much I read." - Charlie Munger

Why avoid getting influenced by finfluencer endorsed products?

Finfluencers ( financial influencers) on social media requests to subscribe to some financial products from time to time. Please remember, even if the finfluencer has millions of followers, does not mean the product he is endorsing will turn out good. After all, in most cases , he /she is doing it for money, nothing else- most of them don't care and will take no responsibility if you lose money investing in products they endorse.
To give an example, very famous youtubers were endorsing Vault, a crypto based platform based out of Singapore- lot of people invested their money based on the youtubers' recommendations, but last year Vault declared bankruptcy, and investors got trapped. Very recently, another 2 famous influencers were promoting a Forex trading firm which turned out to be running without regulatory compliance , duping investors' money.
Bottomline is, do your own diligence and risk assessment before jumping into unknown financial products, especially which does not come under the regulations of SEBI or Govt of India or RBI- don't get influenced by any influencer, whatever his follower count be.

Why avoid Penny stocks & Pump and Dump stocks?

Avoid investing in penny stocks or pump and dump stocks ( pump and dump stocks are those where operators manipulate stock prices upwards by huge trading volumes for certain number of days and simultaneously circulate messages through social media groups to trap retail investors to buy . When retail investors buy, operators dump these shares to retailers and exit the market, leading to collapse of share prices within a short period of time, without giving any chance to exit the stock, thus leading to huge losses to retail investors.) Recent such case was in Axita cotton, Goyal Aluminium etc.
Penny stocks are penny for some reasons .In most cases, their business is going through very bad phase, coupled with high debt, and in some cases, business is loss-making.

While experts may be good penny stock pickers, try it out when you become an expert.Hold your horses till then.

Avoid buying penny stocks because they look cheap

Some of us buy penny stocks on the basis that buying a stock priced Rs 5 is cheaper than than buying a stock costing Rs 5000. We also think the Rs 5 stock will grow much faster than Rs 5000 stock. This is a prevailing misconception. Stocks grow by percentage points based on their current price, and percentage growth depends on its growth in earnings. Ultimately, the amount invested will grow by similar percentage. Say you bought 1 stock of Rs 5000 and 100 quantity of Rs 5 , invested value is Rs 5000 for both cases- because you got 100 quantity does not mean you got a bargain and bought more. Ultimately, this R s5000 investment is same for both- the quality of the company will determine the fate of your investment and not because price of the stock is lesser.

Beware of guaranteed returns providers in financial markets

There will be people luring you with guaranteed returns if you invest according to their advice. Please remember, in stock market, there is nothing called guaranteed returns- that is how it is. It is illegal to commit guaranteed returns in any product linked to stock market according to SEBI- none can commit, including registered SEBI advisors. So next time someone promises you guaranteed returns, you know what to do.

Run away.

Why avoid stock tip providers?

Some stock tip provider companies may contact you with investing calls/ trading calls claiming humongous success ratios, like 80-90%. Remember, even the world's best traders say they have success ratio of 40-50%, and for investors 50-70% stock picks go well. Once you allow yourself little time observing the market and studying its history, you will find out those promises do not work.
Another reason for avoiding these tips at start is correct position sizing- tip providers will be so bullish in their pitch that it may compel you to break your FDs and put that amount in their recommended stocks. If you are not lucky enough, you may end up eroding your capital before you even realize. So better to go slow. Spend more time in LEARNING- this is the only EDGE that exists in the market.

Avoiding profit screenshots channels in Telegram/ Whatsapp groups

There are lot of telegram groups who will bombard you with their profit screenshots to make you feel you are missing something in the market by not following their PREMIUM SUBSCRIPTIONS.
Better unsubscribe all Whatsapp/ Telegram channels providing such calls or bombarding you daily with their profit screenshots- free or paid, until the time you learn a little bit about the market. After all, they won't bear your losses in the market. Avoid believing in any GETTING RICK QUICK SCHEMES in stock market. There aren't any such schemes.
Only subscribe to groups from where you get some learning about the market.

Avoid going all out JUST after attending new investing course

After you have attended a new investing course, always verify those learnings after applying them in 20-30 companies before you actually commit your hard earned money on that. Don't take anything on face value. Often things taught in some courses don't actually work unless you understand the full context. It may take you 6 months practice and re-reading the notes before you start grasping it fully- if you invest immediately based on your partial understanding, you may end up doing some mistakes. Sometimes, after 6 months of applying the knowledge taught, you may find they are not working, there are missing links and you need to learn more.

So better not to be in a hurry, give yourself 6 months time before you commit your money after attending a new course. Market will give you opportunity for coming many years if you are prepared well.

Avoid investing entire capital at your disposal at one go

Start with a smaller amount, understand the market for 1 year at least, understand how your psychology is working when stocks fall, before increasing the amount. This period will teach you about your capability deal with VOLATILITY and UNCERTAINTY that is the true nature of markets, whether this nature of markets suits your investment style. Accordingly, may decide after 1 year, whether to increase investment capital or not.

Remember, it's a MARATHON we are running for next 20-30 years, its not a 100m run.
Just by staying in the game long enough gets you ahead rather than exhausting yourself in 1st 2-3 kms.

If you find this useful, consider forwarding to new investors who are starting out their journey. May help them avoiding pitfalls of markets.

#themoatinvestor #stockanalysis #pumpanddumpstocks #DMoatInvestor

Mistakes to avoid while starting to invest

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