Three Challenges Investors face while buying and selling shares
HDFC SEC, Tester
In India, investors, unfortunately, never take the portfolio approach while buying or selling shares. They add new stock in the portfolio without giving a thought of how well a new company fits into the existing set of companies. Am I overexposing to one sector or market cap in the process? Randomly ask any investor, does he look at the construct of the portfolio before buying new stock? 99 investors out of 100 will give you an answer in negative. I will not be surprised if all the 100 answers are negative.
The reason for this is straightforward. People buy the company, not with an idea to create a portfolio but to create individual scrip returns. The scrip approach is the biggest mistake the retail investor makes. This wrong approach results in two problems. First, they will have more than 50 companies (I know few investors are having more than 150 companies), making it hard to track companies' fundamentals. Second, they will have overexposure to small and micro caps. It's not that they invested in small and micro caps. The companies that they invested in have become small and micro caps due to underperformance. Instead of reducing this kind of tail companies from the portfolio, the investors keep adding more such companies every year. To find out whether you have made the same mistake or not, answer this question. Do you hold a greater number of companies as of March 2020 as compared to March 2019? If the answer is yes, you seriously need to optimize your portfolio at the earliest.
In my 30 years of tracking the stock market, I have realized that retail investor faces three challenges each -while buying as well as selling.
Buy-side Challenges
- What to Buy
- When to Buy
- How much to Buy
Many people will tell you what to buy. And hence this is not challenging, but the quality of tips is always under scrutiny. When to buy is equally important. If you happen to acquire even good quality company at the wrong time, your returns may not be high though you hold the company for the long term. In the case of Wipro, in the last ten years, absolute returns are a mere 13.68 percent. Larsen and Toubro its 15.54 percent, and Hero Moto gave negative returns of 11.28 percent.
But the biggest challenge on the buy-side is how much to buy. The right amount of allocation is the most critical decision that decides what returns you create on the portfolio. Let me explain with an example. You bought HDFC Bank and Yes Bank at the same time ten years back. You invested Rs. 1000 in HDFC Bank and Rs. 1,00,000 in Yes Bank. You can now imagine what returns you would have made had you invested in HDFC Bank what you had invested in Yes Bank and Vice versa.
Sell-Side challenges
- When to Book Profits
- When to Book losses
- What do you buy next after selling?
Most of the retail investors don't have a sell strategy. Even most of the matured investors have a poor sell strategy. Very few have clarity in terms of when to book profits and when to book losses. Let me explain what I mean.
Investors are generally quick in booking profits, especially with winning stocks. You may have bought Hindustan Unilever but was fast enough to book profit missing out on participating multi-years rally. Another challenge investor faces of not booking profits at the appropriate level. Many investors bought Graphite at a reasonable level. The scrip gave handsome returns, but in the hope of selling at the top price, they missed a golden opportunity to make money..
When it comes to booking losses, investors are lax. Invariably they will hold on to their loss-making companies in the hope of recovering damages. My observation is that most of the investors will have at least 60 percent of the companies which are giving negative returns. Unfortunately, many of these companies will never make money, and hope becomes eternal. Just look at your portfolio, are you also having a similar issue?
The third part is what to buy next when you sell. The trickiest part for the investors is this. They usually sell gold to buy copper. Can you recollect selling Hindustan Unilever to buy Manpasand Beverages? Can you recall selling HDFC to buy DHFL? If yes, you need to improve upon your strategy.
Now evaluate yourself based on following observations to understand where you stand when it comes to your equity strategy:
- While buying new stock, I don't look at the construct of the existing portfolio
- I have more than 50 companies in the portfolio
- The number of companies in my portfolio in the last 12 months has increased
- I am usually quick in booking profits and miss multi-years rally
- I often fail to book profits at higher levels
- I am usually not fast enough to realize my mistake to book losses
- I often make a wrong stock selection while churning the portfolio
- My portfolio consists of more losers than winners
If you have ticked more than six boxes as YES, then you urgently need to optimize your portfolio. Our portfolio optimizer tackles all the challenges mentioned above. It helps you to book profit at the appropriate level. It helps you to buy the winning companies. It helps you to reduce poor quality companies to make your portfolio strong and resilient. Last but not least, it tracks your portfolio 24X7.
Sunil Damania
Chief Investment Officer
MarketsMojo
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