Three ‘costly’ mistakes in a retail Investor’s life....
A research study done by ISB Hyderabad on Indian retail investors revealed that investors lost ~Rs 84 billion in the 18 month’s period used for sampling. These losses were equivalent to 0.8 per cent of the country's gross domestic savings! Interestingly these losses were attributed to some basic but costly mistakes which all Indian as well as global retail investors, who do not take professional advice, are prone to commit.
Reward the beast and beat the best Investors have habit of selling winning stocks too quickly and holding on to loosing stocks for too long. What any professional investor would classify as irrational behavior, is perhaps the single biggest destroyer of retail investor’s wealth. How would you feel about a coach firing in form batsman and keeping out of form players in his squad? What sounds like an absurd thing to do as a coach is repeatedly done by even experienced investors. Result is an unbalanced portfolio with increasing allocations to bad performers.
Love for the favorite Ice-cream We have a habit of repeating flavors that we like. However, when similar behavior is shown in stock picking, it costs money. Investors tend to repurchase a stock that they previously sold for a profit than one previously sold for a loss. This behavior is very similar to story of a cricketer who used a red rag to wipe away some sweat during a Test match. He went on to score a hundred and also to keep the red rag in his pocket when batting for the rest of his career! We all know that superstitions won’t create wealth for investors but old habits diehard!
Feels like home – heavy price paid due to missed opportunities: Investors have tendency to hold concentrated portfolio in companies that are close to where they live or in their industry of employment. Such Investment decisions inspired by “familiarity” rather than “returns” lead to concentrated portfolios with much higher risk and below par returns.
Having employment and investment in same industry/company can even turn out to be disastrous. Famously, Enron employees had 62% of their retirement plan assets invested in the company stock at the end of 2000. By December 2001, the company had declared bankruptcy and its employees had lost both their jobs and a large fraction of their retirement income!
Investing, like all specialized fields, needs a lot of preparation and discipline. An underprepared or un-prepared investor will surely get trapped into one or several of these costly mistakes without even having an inkling of the reasons dragging his or her portfolio returns. While Inertia framework provides immunity to our investors from these, we remain committed to spreading the word and helping as many investors as possible.