And finding a buyer for your property may take time. In real estate, for example, transfer costs of around 8%–15% of the cost of the asset apply every time a transfer takes place. In real estate or in gold jewellery-the two other common investments for Indians-exiting can be difficult and typically involves expensive fees. Listed shares are generally highly liquid, so if a stock underperforms, you can get out of it quickly-without incurring large exit charges. One invests in shares to make profits and create wealth. There’s no room for sentiment in investing. The right approach would have been to sell in late 2014 or early 2015 as soon as the mistake became apparent, or, having already waited through difficult times, to persevere until the scrip reached its true potential. Thus, the investors who sold in Q 2 after finally recovering their cost achieved the worst possible outcome. As it turns out, this too was a serious mistake: after crossing 35 to 40 range in Q 2, the scrip went on to cross ` 100 during Q 4 of 2016. The investors who waited for cost recovery and sold in Q 2 2016 earned no return even after waiting for 2 years.
When Manappuram Finance’s price collapsed during late 2014 and early 2015, investors should have opted to “stop loss” and sold the scrip, as there were serious concerns about the stock at that time. Let us now consider where mistakes were made. No doubt, many of them sold in the second quarter of 2016, when the price finally exceeded their cost. Investors who entered the scrip in the 35 to 40 range during 2014 would have had to wait about two years to recover their cost. The price remained below 30 for most of 2015, then started rising in early 2016, reaching the 35 to 40 range in the second quarter. A few months later, the scrip fell into the range of ` 20 to 25, due to some regulatory concerns and the fall in gold prices. Let us look at its price movement over a period of several years.ĭuring the middle of 2014, Manappuram Finance was quoting around ` 35 to 40. A good example of this lesson is the scrip Manappuram Finance. If the scrip is actually a good value, it should be kept until it reaches its true potential, not sold for a small profit. If the scrip was a poor choice, the investor should have sold it as soon he knew it, rather than wait (forever) for the scrip to regain its original value. In reality, they are making one of two mistakes. If, after a prolonged wait, the scrip slowly creeps up in price and passes the level of the investor’s original cost, they finally sell the scrip for a small profit, feeling satisfied that they averted a loss. Investors of this mindset cling to scrips that have lost value, convinced that the cost will be recovered if they only wait long enough. This results from the mindset that all investments should be profitable in the end.
One very common mistake is booking profits in winners while keeping losers. The key is to recognize the mistake, correct it promptly, and avoid repeating it. Mistakes are not just possible but normal. Even the most talented and studied investors do not buy the right stocks all the time. The fact is that investors often choose the wrong track, sometimes out of ignorance but more often because their mindset is wrong. But of course, this is trickier than it sounds. It goes without saying that, to create wealth, one should invest in winners and not losers. The fundamental reason for investing in stocks is to create wealth.
Topics covered under this Article are as follows: “The true investment objective of growth is not just to make gains but to avoid loss.” – Attributed to Philip Fisher.
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