An investor posted a question on Quora about the ‘Don’ts’ when investing. I thought that his or her question deserved a detailed article. I felt that I can’t do justice through a few short, bulleted sentences. Hence I write this post warning investors about the ten critical don’ts when investing. Please read, understand and use them for safe, happy and stress-free investing.
Don’ts When Investing: 1. Don’t Dabble in Stocks Without Sufficient Knowledge
I have seen a number of innocent investors enter stock markets without knowing anything about stocks. This is dangerous. If you play in the stock market you can lose your life savings in seconds. This is not because stocks are dangerous. They are not. Stocks are a golden egg laying goose. But you should know how to handle them.
This is not because stocks are risky. They are not. For that matter, the risk is not attached to any particular instrument like stocks, bonds and so on. Risk comes from unawareness. Warren Buffett said, “Risk comes from not knowing what you are doing“. In fact, stocks are a golden egg laying goose. But you should know how to handle them.
In fact, stocks are a golden egg laying goose. But you should know how to handle them.
So, what is the solution?
Learn to invest before you dabble in stocks.
Read the book, “The Intelligent Investor”, by Benjamin Graham.
Don’ts When Investing: 2. Don’t Trade
I say this from my personal experience. In the beginning, I too was a day-trader. One day I lost my entire life savings in a few seconds as the market crashed and my bets backfired. Besides the financial loss, the anxiety and stress of day-trading spoilt my health.
3. Don’t Invest for the Short-term
Stock markets swing like a pendulum from extreme optimism to severe pessimism.
When you invest for a short-term, say three to five years, it is possible that the market may correct soon after you invest. Your investment could depreciate. You may worry that your investment decision perhaps was wrong.
On the contrary when you invest with a long-term timeframe, say 30 to 40 years, these stock market ruffles even out. And during such long periods, your investments also will plenty of dividends, interest and other such regular income. They will also give you good returns through a natural price increase.
Don’ts When Investing: 4. Don’t Start Late
Beginning investing late will not give you the fantastic results you deserve. Investments need 30 to 40 years to give you true benefits of the compound interest miracle.
Starting early will certainly offer you the advantage of investing early. You should start investing early. Ideally, you should start at 18. But I know that in India where I live, parents compel children to study. Postgraduates are common. So, perhaps 24 is the practical age to start. And if you start at 24 or 25, you can retire rich – a crorepati (millionaire).
If you have already missed the bus, please don’t despair. Even 20 to 25 years investment period will give you impressive results.
Don’ts When Investing: 5. Don’t Invest at a High Valuation
When investing in stocks, don’t buy at a high valuation. Investing at premium prices poses the risk of a financial loss during a market crash.
Buy stocks only at or below their intrinsic values.
But, how to know whether the price is expensive or right?
For this, you must first find the intrinsic value of the stock you wish to buy.
Once you know the fair price of the stocks you are not scared when the market crashes. Suppose the fair price of the share is Rs.100 and the
For example, let us suppose that the fair price of the share is Rs.100. Let’s assume you had bought the share at various prices below Rs.100. And your average holding cost is, say Rs.83.67 apiece. Now suppose the market collapsed and the share is trading at Rs.72, you don’t panic, do you? Because you know that a stick worth Rs.100 is available at a throwaway price of Just Rs.72. You may buy more or if you don’t have an investable surplus you can afford to simply sit tight.
On the other hand, if I had bought the stock worth Rs.100 at various prices above Rs.100 and my average holding cost is Rs.176, my situation is dangerous. My investment has really depreciated by Rs.76 (my holding cost of Rs.176 – intrinsic value of Rs.100). If we consider the current market price of Rs.72, the depreciation is Rs.104. A loss of a whopping 59%.
6. Don’t Invest in Initial Public Offers (IPOs)
When companies that issue shares to the public, usually for the first time, it is an ‘Initial Public Offer (IPO)’.
In India, I have observed that almost all IPOs are highly priced. The companies are extracting more than the worth of the shares from the investors by many times. The shares are invariably offered at price to earnings ratios in the range of 70 – 80 times. Whereas only a price to earnings ratio of 10 to 15 times reasonable.
This leaves nothing in the hands of investors as the true value. On listing on the stock exchanges the stock may trade at prices higher than the IPO price. But this is immaterial.
But this is immaterial.
Basically, the issue is expensive and unfair.
I never subscribe to an IPO. And I recommend you not to.
Don’t be worried that you may miss the bus. You will get plenty of opportunities to buy the shares at prices much below the IPO offer in a few years.
7. Don’t Let Fear and Greed to Overpower You
Warren Buffett says that you need not be a genius to make investing success. You need a good temperament. You need to conquer the two negative emotions: greed and fear.
Many innocent investors enter stock markets intending to make a quick profit. Usually, the market is already at its peak. Soon it crashes. The same investors are scared now. Scared of a loss. They usually sell at a huge loss and exit the stock market.
Sadly, this same story repeats every few years.
For investing success, you have to overcome greed and fear.
Don’ts When Investing: 8. Don’t Listen to Market Tips
Your stock broker most likely feeds with market tips every day. Let me give you an example of the ones I receive often. These generally run as follows:
“Buy XYZ Ltd. at Rs.32.50. Target Rs.52.00 by such and such a date. An upside of over 61% in nine months.”
Now please tell me if the stock is surely going to up by 61% in nine months time, why will the broker recommend you to buy instead of buying himself?
Please don’t listen to them. Simply ignore them.
9. Don’t Watch TV Programmes Featuring Stock Market Experts
Business television channels dole out hours and hours of expert opinions about favourite stocks and economic sectors.
The TV channels use these programs as fillers; how can you broadcast 24 hours with credible news?
The so-called experts use these programs for building their personal brands and promoting their business interests.
Honestly, this is nothing but utter noise.
Don’t waste your time watching these programmes. Instead, read the annual report of a company. Finally, never ever act upon such advice.
Don’ts When Investing: 10. Don’t Blow Your Money
Every day I see young, well paid white-collar employees earning handsome salaries blowing their hard-earned money on unwanted luxuries. This is a crime. In order
In order to become rich, you first need to learn to lead a simple life. Warren Buffett though one of the richest persons in the world, yet leads a simple life. Why? Because he realises the power of compound interest. The miracle of compound interest can grow even the seemingly insignificant sums into huge wealth over long periods of time.
Beware of the marketers who are ever trying to tempt you into spending your money. Don’t fall for their charms.
Dear visitor, I have given you ten crucial ‘Don’ts When Investing’. These are not entirely my original ideas. Many are Warren Buffett’s and other such wise men. So, please follow these diligently and benefit.
Happy investing and sure and safe progress towards wealth and riches!