Stock Picking – Hits and Misses

Disclaimer: This is just a running diary where I consolidate my portfolio status on a monthly level, usually at the end of the month. This is in NO WAY an Investment Advice and is not intended to be a recommendation. Please check with a SEBI registered financial adviser for legal advice before investing.

Off late, I am reading many good books on investing, stock picking, portfolio construction and financial planning. A subject of interest, I am more and more intrigued as I start reading more minds in the arena. Having a couple of co-passengers in bus who are market and investment savvy, makes the bus ride worthwhile and a learning experience.

One of the recent topics of discussion has been the human mind vs market forces. Typically, a small investor is triggered to safe-guard their profits and hope that their losses convert to profits. Literature has varied names for the same, but I feel it stems from the overall grounding of the individual. When there is no backup and an individual comes up from lower economic strata, the person is conditioned to be very cautious.

Human brains become biased when a particular stock is in gain. There is always the thought of cashing in the profits and reinvesting the same to get a better bargain. In this process, we commit the most cardinal sin of stock investing i.e.*not giving enough time in the market*. In simple mathematics, the formula for compound interest is

Amount = Principal * ((1 + ROI%) ^ n)

N is the time factor which determines the overall return of the investment. Good companies with sound fundamentals always return handsome returns. One needs to have the patience and resolve to tide over the market cycles. I know it sounds cliched but hard facts never lie.

Off late, a lot of market experts and punters advise to book profits. Well, this author also did the cardinal sin of booking profits and reinvesting the same. Yes, based on the tune of investment, one could argue that you did a tidy sum. Until…. you start looking at how much you have lost by booking profits. Sample this..

HitsLosses

I have left out Banks (as I don’t regret booking profits) and Speciality Chemicals as they are in a massive bull run.

The lesson to be learned out of this is that instead of booking profits, if I had continued to be invested in the same set of stocks, I may have been in green (am in deep red, but that’s another story) and actually be sitting on a tidy profit.

However, what about the flip side of the story? Well, for one, research the company before you invest and only when convinced, put your hard earned money. I have done the most cardinal mistake of not doing so, and put my money in Nitin Fire Protection Services. The result is there for everyone to see. I am writing it off my books for now as it’s become a junk stock. I even tried to book losses, but couldn’t do so as there are only sellers for this stock and no buyers.

In a nutshell, to summarize, following are the learnings from the lost money i.e. literally and figuratively.

  1. Research the company thoroughly and invest only thereafter
  2. Cut your losses when your assumptions don’t hold true any further
  3. Invest in a good company and stay invested – Don’t look for short term profits, but look at a bigger picture
  4. More importantly, don’t forget Rules 1 – 3

Suggestions / Comments / Thoughts are most welcome..

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