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Markets: What's your investing habit? - Views on News from Equitymaster
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  • Feb 22, 2006

    Markets: What's your investing habit?

    The markets moved into higher territories yesterday - again! However, this time around, the feat was not achieved easily and a fair amount of volatility was witnessed. While we reckon the volatility to continue going forward, one thing is for sure that gone are the days of the one-way movement that was seen in 2005. In this write-up, we try and caution investors against some investing habits that can cause a dent in their portfolio.

    Investing with a short-term view: This is the most common mistake an investor makes, as he/she is too focused on quarterly trends and thus, clearly misses out the larger picture. This short-term mentality is a bane in the long term, as research shows that the shorter the time horizon of investments, the more are the chances of losing money and the longer the time horizon, the lesser the chances of losing money. This is especially true with respect to investing in equities.

    One must remember that famed and successful investors like Warren Buffet did not become rich overnight or by indulging into trades settled within a fortnight or a month. Also, with a long-term horizon, volatility is easily eliminated.

    A short-term view breeds speculation: A focus on the short term has created an atmosphere that favors speculation rather than investing, and individuals are as susceptible to it as professional investment managers. Speculation is like trying to forecast the psychology of the market. One can never 'buy at the lows and sell at the highs', which is not as easy to do as it sounds. Instead, take a longer-term view of any stock and it becomes much easier to ride out the crests and troughs over a period of time. As we mentioned above, the longer the time horizon for investing in equities, the greater the chances of making money.

    Not studying companies before investing: Since an investor has access to loads of information, choosing a security in these markets has become a difficult task. Also, when to buy, when to sell and when to do neither has become incredibly complex. People have come up with new tools like techno-fundamentals in order to maximise gains. But in our view, these shortcuts are just new innovative ways by brokerage houses in order to woo clients. Before investing in a stock, an investor should always study the companies and their business models in order to get a holistic view of its growth prospects in future and then take a call.

    In our view, one should be a disciplined investor. Although it is easier said than done, once an investor has bought a stock, he should at least make his own calculations and keep a target in mind, as greed has a nasty habit of overcoming oneself and he/she might be stuck with the stock in anticipation of a higher price. Every investor has a different risk-return profile and thus, what suits one might not suit the other.

    Although, we agree that there is no foolproof way of making money in the markets, investing through research is better than relying on short term tips and getting happy by making a 5% gain in a week and missing out a 25% gain possible in a year. Not to mention the fact that, rather than the 'investor', the broker for sure is getting rich! Thus, safety holds the ultimate key in investing. After all, no one wants to get caught on the wrong foot.



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