Investing is hard. 

It can be more overwhelming for new investors. They have to deal with all sorts of doubts; which stocks to buy, which sectors to pick, when to buy, when to sell, etc.

Although we cannot answer all those questions in this post, we will try to make your life easier by sharing the 5 common mistakes that investors make (which costs them a lot of money) and how to avoid them.

After all, a rupee saved is a rupee earned!

So, here we go…

Mistake#1 Investing based on some stock market guru’s tips

If you are a beginner to the stock market, you would be tempted to follow “experts” on TV who knows how the market works. After all, these guys come on TV every day and it seems like they know what they are talking about, right?

Wrong.

The reality is that most of the stock market pundits have an abysmal track record of picking good stocks and most of the stocks they recommend have already run up a lot.

In fact, we did a longitudinal study of the recommendations of over 20 analysts for 2 years and only 5% of them were able to beat the performance of benchmark indices such as NIFTY or SENSEX.

So, the first lesson is to do your research and never rely on someone else for stock advice.

Mistake#2 Investing in micro-cap stocks

Microcap stocks (i.e. stocks with very low market capitalization) are very attractive to beginners.

Sometimes the attraction comes from the fact that the stock prices of some of these companies can go up multiple times (e.g Titan, which went up from 5 rupees to 1000 rupees)

Sometimes, their business models may seem attractive and their story seems to be exciting (for example, a company planning to turn water into fuel).

In this excitement of catching the next big multi-baggers, a lot of beginners invest in such companies.

There is only one problem though; finding a microcap that will become the next multi-bagger is like finding a needle in a haystack. It’s almost impossible, especially for beginners.

I am not suggesting that you should never invest in microcap companies. All I am saying is that you should do it only after you have accumulated several years of investing experience.

Mistake#3 Investing in penny stocks (priced below 50 rupees)

Have you ever stepped into a China Bazaar? You know, the ones where they sell cheap Chinese products at ridiculously cheap prices?

We all know that all that low-quality stuff is crap and that they won’t last for more than a few days. Still, many of us can not resist the temptation of buying at these “bargain” prices.

So, think of the penny stocks as that Chinese “stuff”- low priced and attractive, but very bad in quality.

Don’t get attracted by these penny stocks because remember – if a stock is trading at 10 rupees, it can come down to 5 rupees and even 1 rupee at some point.

Mistake#4 Investing more than 10% of capital in one stock

Has it happened to you that you liked a company so much that you committed most or all of your capital towards it?  

If yes, then you have committed a sin that is contrary to what is known as the first principle of investing – Diversification.

By putting all your eggs in one basket, you’re now vulnerable to the fortunes of the company. If the company does well, you would of course do fine.

But what if the company doesn’t perform well?

Mistake#5 Expecting a quick return

The moment we buy a stock or invest in a mutual fund, we start checking daily whether the portfolio is going up or not. That is not the right mentality of an investor- that’s the mentality of a trader.

By the way, there is nothing wrong with being a trader- I am an active trader but when I invest, I know that I am in that investment at least for the next 5-10 years or hopefully even longer.

Investments do not grow linearly. They take their own sweet time and if you want to be a successful investor, you will have to give enough time to catch the next bull market, which would take care of all your investments.

I hope the above advice would help you make better investment decisions.