There are many theories that investors follow in their investing decisions. Many of these theories are psychology based theories that results in loss most of the time. Do you also follow any wrong theory ?
1. Stock is down too much already Can’t go further down
Many investors buy stocks or continue holding the falling stocks by assuring themselves that it’s gone down this much already , it can’t go much lower. They keep telling to themselves to have patience in the stock and there is no sense in getting out of the stock at this lower level. Averaging the wrong stock at lower level is the another suicidal mistake that investors do.
One of my friend bought a big chunk in moserbear at 110 levels he came to me saying that the stock is available at damn cheap level it has fallen from 300 and is available at 1/3rd price. He talked about the fundamentals saying its the largest cd/dvd manufacturing company, its in the movies business as well and the stock should perform great in the coming days. Within a year the stock became half. He kept saying to himself ‘it’s gone down this much already , it can’t go much lower’ . The stock came in media later after the company announced to get into the solar power business , analysts on TV started recommending it with big targets as its going to build the largest solar power station in the country. My friend bought more shares hearing this news and lowered his buying price. The stock did went up somewhat and made him felt that he was right. Later the stock fell further to 10 Rs levels. He investigated the matter of fall and came to know that there is delay of years in the power plant, because of which the stock is not performing and said to himself it will go up like a rocket after. The power plant never became functional the debt on the company kept on increasing and the stock made a low of 2 Rs
Rise and fall are the common thing in the stock market, good stocks also fall, but when any stock is not performing for months and years it definitely means there is something terribly wrong with the company. Because of pen drives cd/dvd business became dead, because of things like torrent, movies business fallen a lot. Moserbear is a company which has no experience in the power business and it failed to perform. The debt kept on increasing. Any stock in this situation cannot perform. The same happened with mosearbear who became a 2 rs stock from 300 rs stock. One should understand the fundamentals and should not buy anything just because its cheap. Even a 1 Rs stock could be expensive with poor fundamentals.
2. Predicting the bottom and doing bottom fishing
Bottom fishing is what many investors do. It could be good if the stock is good but worse if its bad. You must have heard the phrase “do not catch the falling knife” from many expert traders and investors. Do not try to do bottom fishing with falling knife kind of stock, until the knife hits the ground and sticks, and then vibrate for a while and settles down. Grabing a rapidly falling stock results in pain, because you buy it at wrong time. Wait for the stock to settle down and when you get reversal signals then only think of bottom fishing.
3. Stock is up too much, can’t go further up
Many investors simply sell their stock because they feel it has gone up too much and can’t go further up. For some 30% up side is too much , for some 50% up side is too much and for some 100% up move is too much. This is the reason why many investors fails to get multibagger returns. 90% investors sell their stock after it becomes double. If the earnings of the company are growing continuously, fundamentals are strong, then sky is the limit for the stock. A 3 Rs titan stock became 400 Rs stock, a 17 rs eicher became a 12,000 rs stock, a 300 Rs page industries stock became 10,000 Rs because the earning of these companies kept on growing. Always check if the earning of the company are growing or not before planing to sell it.
4. Its a very cheap stock nothing much to lose
I have seen people buying 5 rs and below stock saying its very cheap nothing much here to lose. They feel its much safe to buy a 5 Rs stock than a 50 or 500 Rs stock. They don’t try to understand that only junk sells cheap. A 5 rs stock can also become a 10 paisa stock. Whether a stock costs 50 Rs or 5 Rs , if it goes to zero you lose everything. The potential risk is same in both. If you invest 10,000 in a 50 rs stock or 5 Rs stock and if each fell to zero you will lose the same 10,000 in both. The probability of a penny stock having bad fundamentals is much higher than the fairly priced stock and the chances of losing more are always higher in penny stocks.
5. Will sell when the stock rebounds
Many failed investors continue holding the stock with the hope that it will rebound one day and that time I will exit from it. But the downtrodden stock never comes to the level at which the investor wants to sell. They keep waiting for years with the hope of rebound which never comes. Many traders who bought the stock with the view of few days becomes long-term investor hoping to get their price. A good investor is always quick in cutting his loses, as soon as he finds something wrong with the company he just exits no matter what the price is.
6. The stock is taking too long to move, I am exiting
Warren Buffet says investing is the process of transferring money from to pocket of impatience to the pocket of patience. People get out from quality stocks when it fails to give quick returns. They get tired of waiting and get out and when they get out the stock shoots up. When the fundamentals of the stock are promising, patience is often rewarded. The stock can test your patience for months and years for multi Bagger returns but will definitely give you good returns if the company is fundamentally strong.
7. I missed this stock, will catch another of same sector
Every good stock of the same sector can’t become the multi multi bagger stock. Though bajaj auto , heromoto are equally good stock with bigger market capital but they can’t become eicher motors. In media many experts come and comment like this is going to be next infosys, next eicher etc but the reality is there can’t be many kings in the jungle. The historical data proves the chances of multi bagger returns from an existing multi bagger stock is higher than other stock of the similar sector. In most of the cases its better to buy the original good company at a higher price than to jump on the next one at cheap price.
8. Stock moving as per my expectation, so I am right
Many times a wrong stock moves in expected direction and makes you feel that our analysis is correct. But if the stock is wrong it will ultimately move against your wish. If you exit quickly then you can make decent profit. But most investors don’t exit at favourable situation. Instead they convince themselves on the basis of initial favourable movement that their investment choice is right. They hold on the stock until the lower price convince them that their investment choice is wrong. Stocks like JP associate went up from 45 to 90 in few months time and made people feel that their investment in JP was right, but when it fell to 25 in couple of month then they realized they were wrong.