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Sunday, July 4, 2010

My biggest mistakes

It’s not as if they were born with their stock-picking skills. They learned–and are still learning–the hard way. Says BSE (Bombay Stock Exchange) broker Rakesh Jhunjhunwala: "You learn the stock market by trial and error. Without making mistakes in the market, you will never be able to progress in it." What’s important is to spot the mistakes, learn from them, and move on.Five veterans of the Indian stock markets talk about their worst blunders, and the lessons they learned the hard way.There are great lessons and many little nuggets of investment wisdom–on market behaviour, valuation methods, portfolio management, investor mindsets–in their stories. Over to the gurus in their own words.

1)Motilal Oswal
Chairman and managing director, Motilal Oswal Securities

In 1992-93,I bought shares of a glass company at Rs 1,600. The price crashed, and I exited when it was Rs 60. Why did I buy the stock? The outcry system was in vogue, and everyone on the floor used to share information, which was our idea of research. If I liked an idea,I just bought the scrip.

We never invested with a time horizon. If the share price went up, we booked profits. We followed no investment strategy and did not bother with research. At one point, I had 125 scrips in my portfolio. Eventually, at the end of the year, I sold those that made a profit and held on to those that showed a loss. Obviously, the total return on my portfolio was not worth the effort put in.After that, I decided to prune my portfolio to 30 stocks–and booked more losses in the process. I decided to invest the money left with me wisely, balancing my portfolio with a long-term outlook. Now, I hold every stock for at least one year, and then, depending on the market situation, decide what to do with each.

Lessons:Do your homework well.While choosing a stock, you could use either the top-down approach or the bottom-up approach.Don’t follow the herd.Don’t buy (or sell) just because everybody and his dog is buying (or selling). Research the com-pany as thoroughly as possible before deciding to buy or sell. Don’t buy in an overheated market and don’t sell when there is panic.

2)Gul Tekchandani
Chief investment officer, Sun F&C Asset Management

Every time I blunder in the market, it’s because of excessive greed. When share prices move up and I hear favourable stories, I don’t think of selling and always hope to make more. I remember buying shares of a plastic furniture company at Rs 30. I had analysed the company and predicted the stock would go up to Rs 90. I was right: the price touched Rs 110. That’s when I started hearing stories of the company doing so well that the price would touch Rs 200. So I decided to hang on, in spite of knowing better. Today, the stock trades at Rs 6.

Lessons:Discipline is the key.The market has a mind of its own, one which is quite likely to confuse investors. You cannot make money in the market by acting on market rumours. Listen to the stories, but do your own research–and do it thoroughly. Make your buy or sell decision based on your analysis of the company, not on what others have told you.So, if you have invested in a company for the long term, and the price falls in around three months, don’t change your strategy. The company’s fundamentals have not changed–it’s the market that’s volatile. In the long term, the fundamentals will reward you.Keep track of your investments. However, investing for the long term does not mean you forget about your holding. Stay alert, and monitor your stocks with a view to improving your returns. Keep an eye on the changing economy, because the fundamentals of a company are dynamic and change with the overall economy.

3)Darshan Mehta
Chief executive officer, Anagram Stockbroking

In the early nineties, the primary market was extremely active, and, like many retail investors, new issues made up a good chunk of my portfolio. Back then, pricing of public issues was regulated–and, invariably, conservative.So, even if you held on to allotted shares for no reason other than inertia, you made a notional profit. I was allotted 2,000 shares of Essar Shipping, which I held on to because their cost was significantly lower than the prevailing market price. My portfolio of 85-90 scrips was filled with the likes of Essar Shipping–neither led by a quality management nor the flavour of the season. I slept on them, and lost out–my portfolio depleted in value substantially.On top of that, the sheer size of my portfolio made it impossible for me to track even those companies in which I was invested. One fine day, I gave the list of my holdings–a whole lot of them worthless–to my broker, and asked him to sell it at whatever price he got. But the damage had been done.

Lessons:Maintain a lean portfolio. Don’t grow too big for your boots. There’s no point in having a portfolio of 90 stocks if you cannot track them. If diversification is what you seek, you can achieve the objective with just 10 stocks. What matters is not how many stocks you have in your portfolio, but what kind of stocks these are. Moreover, the fewer stocks in your portfolio, the easier it is to track them.Don’t lose sight of your initial objective. Invest with an objective in mind. Once that objective is met, look to exit unless there are very good reasons to stay invested. In rising markets, new issues ride on the coattails of the bullishness, and list at hefty premiums to their issue prices. But once the euphoria subsides, so does the share price. So, keep your options open.

4)Parag Parikh
Chairman, Parag Parikh Financial
Advisory Services

I believe the key to any good investment is discipline and the ability to control your emotions. Easier said than done. There have been times when I have given in to my emotions–and paid the price.We do portfolio management for clients. Once, we took money from investors when the market was bullish. Obviously, since the market was on a roll, the risk was higher–and so were the chances of going wrong. A disciplined approach warrants that I take money from clients when there are ample investment opportunities in the market, not when people are willing to give me money. I should have had the guts to tell them, "no, don’t give me your money now, I’ll tell you when to give it". But my emotions took over, and I didn’t.

Lessons:Don’t get in at peaks. Stock markets are not always the barometer of the economy, or even of a company. With globalisation and hot fund flows, they have become glorified casinos and don’t always reflect the true worth of its constituents. Hence, always invest for the long term and avoid short-term momentum plays. Bear in mind that momentum works both ways: you could crash as easily as you soar.Don’t speculate.If you buy today and sell tomorrow, you’re not investing–you’re trading. And that is one dangerous proposition. If you don’t understand technicals or are not clued in to the market grapevine, the odds are stacked against you. Be flexible with your investment mix. Don’t hold stocks for the sake of holding equities. Sometimes, it’s better to hold cash or debt to maximise returns. Your investment mix should reflect your perception of the market.

5)Rakesh Jhunjhunwala
Broker, Bombay Stock Exchange

When I am convinced about a story, I tend to go overboard–and over-invest. At times, I have ended up investing a lot of money in illiquid stocks, which is obviously difficult to manage. It’s like putting all your eggs in one basket.In the stock markets, both in India and elsewhere, people tend to invest only when there is a wave of euphoria sweeping the markets. It’s a general tendency to act on the belief that one should not be left behind in a booming market, which is a flawed argument.

Lessons:Don’t be overstretched in a stock. Even if you have hit on a great idea, review your allocations in a particular stock periodically. Ideally, you should not invest more than 15 per cent of your portfolio in one stock. Overexposure can be counter-productive, more so if a stock is illiquid.

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