The Pitfalls of Retail Investors in Direct Equity - By Sanjay Dangi

🔍Insights

Jeenal Jain

Sep 26, 2021 — 5 min read

Spokesperson: Mr. Sanjay Dangi (Director, Authum Investment and Infrastructure Ltd., & Financial investor to many startups). A Chartered Accountant & Company Secretary, Sanjay is a first-generation entrepreneur with an experience of more than 25 years in Investment Banking. He's also an avid investor in early-to-growth stage companies and a philanthropist.

In ancient Rome, a slave would hold a laurel wreath over the emperor’s head in public, whispering to him “Remember that you are mortal”. The successes of investing can sometimes make you feel like a triumphant emperor, especially when you have made big gains in a short period., Yet, whether you’re a rookie investing your first salary in the market, or a seasoned investor, it always pays to remember the dangers of the market from time to time. Here are a few big ones -

1.The Short Term Does Not Pay

Actually, it does. A few people may find that they bet on a stock when it was cheap, and it rose in a short time for them to make a handsome profit. They may call it wisdom or intelligence; I would simply call it their luck. My advice is simple: don’t invest in the stock market if you are fishing for short-term gains. You may be lucky once or twice, but the winds change unpredictably. The stock market pays when you invest for the long term. Over the years, it causes a tide that lifts all boats. Short-term losses will be washed out by long-term gains. The big geniuses you hear of (Warren Buffet, George Soros, Bernard Arnault) were never short-termers.

2. Brains, not Heart

More boats have been sunk by the words “investor sentiment” than by any other factor in the market. I don’t think there are any other words that ought to be as far apart as these two. Investing has nothing to do with sentiment. “Exuberance”, when you invest in a bull market because everybody else is doing, is a great way to lose your head, and your money. “Panic”, when you pull out money in a bear market instead of staying invested, is your way to lose money even faster.

No two investors have the same portfolio. So why should they make the same calls? If you choose your stock portfolio as per your capability, risk appetite and homework, you have no reason to fear if a trend is downward. Unless you’ve invested in the Kabul Stock Exchange, all market trends are temporary.

3. Heed the Mutual Fund Disclaimer

It’s a bit of a joke, the way investing caution is read out speedily at the end of a mutual fund ad. But it is correct nevertheless – past performance of a stock is no indicator of the future. A stock doing well now might crash sooner or later, either because it is over-valued (“exuberance”), the company’s fortunes have declined, there has been a scandal or scam, or what some economists call a Black Swan (read the book, it’s delightful). There’s no reason for you to invest in a stock just because it is doing well (or poorly) right now, in the hopes that it will keep rising, or rebound if it is falling. And that brings us to point #4.

4. Don’t Skip the Homework

If you have taken #2 to heart, then this is the natural follow up. There is a reason that companies with publicly listed stocks are required to put out quarterly statements, annual reports, stock exchange filings, financial statements, shareholding reports and other documents in the public domain. That reason is you – and your financial interest. Please read these documents, and if you don’t know how to read them, there are many useful websites out there to explain, and many online courses nowadays. Look at the fundamentals: has the company been profitable, have its profits been rising or falling, does it have governance issues, does it have shady shareholding? All of these indicate whether the market will reward the stock or punish it.

A personal tip: do all your calculations and make all your notes with pen and diary, or if you prefer, an Excel sheet. Never try to hold all the numbers in your head.

5. Stay invested, but not unnecessarily

You may own stock that is currently falling. The wise men may say that the storm will tide over, and if the company’s fundamentals are fine, the stock will eventually return to its original price. If the fundamentals are fine. Investors who held on to Kodak stock when the world turned to digital photography, believed in a fairy who never came. We are naturally risk-averse and sensitive to loss more than gain. Nevertheless, if you realize the company is not doing well and not likely to do well in the future, cut your losses.

6. Leave Heropanti to Tiger Shroff

Markets may be dumb at times, but you are not smarter than the collective wisdom. There is little reason to ignore conventional wisdom (staying invested for the long term and doing your homework) and make risky investments in the hopes of making a big catch. Two-taka stocks are unlikely to rise unless there is a fundamental restructuring of the company, stocks on their way down might still go down, stocks on their way up might take a U-turn. This is of particular advice to seasoned investors, who have done well and think they can take bigger risks. I’ve been there, and trust me, it is not worth it. Yes, higher risk can lead to higher reward, but only if you hedge your investments. Make sure there are enough blue-chips in your portfolio in case your expected windfall turns into a damp squib.

These were the basics, which bear refreshment from time to time. It pays to make a list of pitfalls and pin them to your trading desk, to remind yourself, just as the slaves of the Roman emperors did.