What's your recipe for losing money in stock markets?

Mar 9, 2011

In this issue:
» Hero Honda deal too good to be true
» China at 60% threat of banking crisis by 2013
» Standard of living to go down in the US
» Double-dip recession if oil hits US$ 140 a barrel
» and more!

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We will tell you a story that you already know. The story is about Thomas Edison, one of America's most famous inventors. Before he invented the light bulb, he had about 1,000 unsuccessful attempts. When a reporter asked, "How did it feel to fail 1,000 times?" Edison replied, "I didn't fail 1,000 times. The light bulb was an invention with 1,000 steps."

A question for you investors: How many times have you failed in the game of investing? Have you consciously reviewed your mistakes? Do you regret them? Do you ignore them? Or do you pretend that you did nothing wrong but the markets deceived you?

The truth is everyone makes mistakes. All great investors have their own share of big mistakes. What differentiates them then? What do they do differently? Well, they do exactly what Edison did. For them, every wrong investment decision is a "way how not to lose money. " With this awareness, they do their best to not repeat the same mistakes.

Now reflect for a moment and think of all the investment mistakes that you have done over the years. List them down on a piece of paper. See if there is a repetitive pattern. Have you been making the same mistakes or new ones? Don't think of this as a stupid, useless exercise. What you have with you is a "recipe for losing money in the stock markets". Keep this recipe safely with you. Keep refining it. Keep adding to the list. And every time you make an investment, just see that you don't make any of those mistakes.

To sum it up, the essence of successful investing lies not in being correct all the time, but in learning and improving upon past mistakes.

Do you think this technique will help you to avoid repeating past mistakes? Share with us or post your comments on our Facebook page.

 Chart of the day
Collectively, we are all bad students of history. So we allow it to repeat itself, albeit, with some changes in circumstances and appearances. Take the current bull cycle in commodities. Thanks to the easy monetary policies of central bankers across the globe, there has been a massive rise in commodity prices. They may continue to rise. How much and how long will they rise? We do not know. But what we know is the tendency of humans to go to extremes. Up to a point in a bull cycle, prices rise for a reason. After that, human minds lose sanity and asset prices lose gravity. Finally, it all ends in a painful crash.

This fact is evident if you just glance at today's chart, gold, silver and oil prices shot up by 2276%, 3099% and 1255% respectively during their previous bull runs. But when the cycles turned and prices crashed, they lost almost three-fourth of their worth (in nominal dollar terms). We recommend this history lesson to be learnt by heart.

Data source: Sharelynx Gold

Two-wheeler major, Hero Honda has finally chalked out its plans to acquire the 26% stake of Honda in the joint venture. As per the management, the stake would be acquired at Rs 740 per share which translates to a total deal size of Rs 38 bn. This is a steep discount to what the markets had expected. However, as it appears the markets are not at all happy with the deal. The company's shares have responded very negatively to the news.

So why is it that the investors are not happy with the deal? One of the reasons for this is that people are skeptical of the huge discount that the company is getting. Many think that this is too good to be true. But the bigger reason is the poor show of governance. The managements of both Hero group as well as that of Honda have been mum about the entire deal. The lack of details on the royalty arrangement with Honda Motors has been a major cause of concern for investors. It goes on to reflect that no matter how big the numbers sound, if a company does not meet governance standards, its share prices would get penalized.

The asset bubble in China's property market is well documented. The possible impact of a bubble burst on the country's big banks can also be envisaged. That too with a good degree of certainty. But rating agency Fitch has in fact gone ahead to put a timeline on when the Chinese banking sector will be hit by the crisis. The agency believes that the odds in favour of the Chinese banking sector being hit by enormous bad loans by mid 2013 is 2:1. The Chinese banks fuelled steep property price rises by extending a record 17.5 trillion yuan (US$ 2.7 trillion) of loans over 2009 and 2010. This was part of the country's stimulus programme after the global meltdown. It is now estimated that the fallout from China's lending spree may be bad loans totaling US$ 400 bn! The dragon economy's GDP growth may be coming in double digits. But the same is not without some grave systemic risks in the medium term.

Thanks to the prudent RBI, Indian banks are still away from such a crisis. However, a step towards avoiding systemic risk is in the pipeline. The plan is to create a risk management entity that will oversee the stability of banks, financial institutions and large non-banking entities.

The US is in a bad shape. And we are not just talking about the ongoing recession in that economy and the high level of unemployment. The big concern is the huge amount of debt that the country has amassed. And in this regard, Bill Gross, founder of Pimco, has urged Americans to brace themselves for a lower standard of living. The reason: There seems to be no easy way for the US to get out of the debt hole that it has dug for itself. Sure, the US has the advantage of the dollar being the world's reserve currency. But this privilege too has been abused with the US Fed printing dollars at the drop of a hat. As the value of the dollar deteriorates, lenders to the US will demand for more returns on the risk that they have assumed. This will lead to hardening of interest rates. Moreover, with debt ballooning, the headroom for the US government to spend on social programs gets lesser as well. All this will have an impact on American taxpayers and erode their standard of living. The US will have to do something drastic to remedy its debt problem lest it turns into a Greece-like situation.

Here comes another doom warning on rising crude oil prices. And it comes from none other than Nouriel Roubini, the man who predicted the previous economic crisis. He says that at US$ 140 a barrel, oil prices will send the global economy into a tailspin. We agree that the impact would be severe in such a scenario. However, we don't think oil prices will reach there on account of unrest in the Middle East and North Africa. We believe that such unrests can't sustain for long for the lack of economic backbone. Especially, because that could hurt the Middle East's own oil business which is the main driver of the economy. Even the current hike in oil prices is not due to lack of supply but based more on the fear of the same. Hence, it should not be long before prices recede.

Yesterday, 8th March 2011 ushered in the 100th anniversary of International Women's Day. But are women given the ability to take tough decisions in India? According to the Corporate Affairs Ministry more than 70% of company boards in India do not have female representation. India also compares dismally on world averages. But there may be a sea change coming soon. Corporate India will now have to take women empowerment in the boardroom a lot more seriously. Companies will have to reserve at least one seat in the board of directors for women candidates. That is if the board consists of 5 or more independent directors. The government also plans on including this provision in the Companies Bill. This will help make the provision mandatory. India has had a history of women's rights violations. We hope that this provision leads to more corporate decision making coming from the fairer sex in the future.

In the meanwhile, the Indian stock markets continue to trade in narrow trajectory. The benchmark BSE Sensex was trading 33 points higher at the time of writing this. Consumer durable stocks lead the pack of gainers. Stocks from healthcare and FMCG space were trading weak. While the other Asian stock markets have closed higher, the European indices are also trading strong.

 Today's investing mantra
"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." - George Soros

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13 Responses to "What's your recipe for losing money in stock markets?"


Mar 15, 2011

Yes for sure...this is learning from mistakes..and keep avoiding doing same mistakes again........I invested in some companies when they loosed around 40% of price only with thinking that it ll turn around.. but in actual these are the companies of sector where they require heavy capital to keep doing business.. & i loosed around 20% again.. so as buffet says...... sectors where lot of capital required to keep doing business..........are least likely to generate profits... so try avoiding as such


JS Pandher

Mar 13, 2011

Dear Sir,
You have hit the nail on the head.One learns from his mistakes.



Mar 10, 2011

When promoters make deal, the lowest they can go is the 1 times the book value. This is exactly what Hero & Honda did. This is the value of share even if it is not listed company. It is pretty fair and there is no need of communication to very short term, short term, medium term, or even sol called long term investors.
this information that is not revealed is relevant and meant for those who as long term as promoters.
When promoters run deals this is the ideal way.
I fully support the companies

Value investors may get opportunity to buy at unbelievable price if they believe in Hero (stand alone) story beginning as new company from now (read Mar 22, 2011)




Mar 10, 2011

Are all the japanese companies coupled with the american
companies buying indian pharmaceutical companies.It makes sense since indian companies operate with almost zilch in profits on a compative basis and these pharma companies want to control the world market.Health care and prevention is the future.They are buying into the world's future by negating the competition from india.



Mar 10, 2011

Panic buying and panic selling will dominate the returns.Mistakes are stepping stone to success.equity master's research reports are unbiased but for the fact they concentrate their vitriolic towards ben barnake.Give us your perception and and you're doing it right.



Mar 10, 2011

sir, i brought 1000 octant interactive 1 year back @ 16.50/pshare. now the company demerger five x finance & octant. but five x finance was not displayed,pls suggest



Mar 10, 2011

Goog company fundamentals with volum of treaging will be a good for tread. when rate cum down buy and keep with us.Wait sill rate goes up.Never be panic and book loss.If company fundamentals good rate will be come up within 1week or 2week and give us profit.


hemendra shah

Mar 10, 2011

It is very important as well as helpful to Learn from one's own mistake and be careful not to repeat the same...It applies not only in the field of Investment but in every sphere of Life...Your analysis are always Excellant and thoughtful.I have always benefited from it...Thanks a lot.



Mar 10, 2011

Well Said... An activity worth doing.


kalpesh vora

Mar 9, 2011

Mistakes are not the issue in stock market. But the real guidance about company fundamentals are very important. I am only saying that you are offering very very good guidance about company fundamentals,valuations etc. No one can earn the money without fundamentals and valuations in which you are the king.

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