From Mistakes, We Learn
Amar is a CFA Charterholder and CFP, having over 20 years of experience in IT and Financial Services. He is very passionate about spreading financial literacy and has authored four bestselling books on Personal Finance.
04 Sep, 2017
There probably is no such thing as a mistake-free life. And very often, even when we have committed the mistake ourselves, the actual realization of that error comes about when someone else commits the same mistake. Overcoming any mistake is possible but the crux of it lies in understanding the error, accepting that you’ve made a mistake and moving on.
The financial aspect of one’s life is pretty much governed by this philosophy. With finance being such sensitive, yet integral aspect of one’s life, mistakes are bound to occur. These could either be because of one’s own fallacy or circumstances out of one’s control. However, if financial success is to be achieved, admitting that you were wrong is the very first step.
Let’s take the case of Mr. Vinay Pradhan to better understand how not admitting one’s mistakes can cause adverse issues in the future. Beginning as a risk averse investor, the stock market lightning caused a drastic change in the way he made his investment decisions. Watching his friends boast of increasing wealth each day, while he only locked into fixed instruments and returns of 6 per cent per year, was frustrating. Eventually, it was the Market Bubble of late 2007 that finally pushed him to make a move from the conservative investor column.
He began by approaching a broker that his friends recommended, went through the process of filling out all the necessary forms and even acquired a demat account in a record time of three days. Thus, within a week, Vinay was all set to enter the stock market. With the extra attention being given to him by the broker, Pradhan, over the course of the next month had invested over Rs. 5 lakhs. As his money grew over 20 per cent within a single month, Vinay began to get a lot more clued into the stock market than his own job.
The one issue he forgot to consider in all the financial growth was that he had begun to routinely remove money from most of his safe investments. This meant that while earlier his asset allocation was mostly debt, now the scales heavily tilted towards equity. In his bid to make as much money as possible, his portfolio made a substantial shift from being risk-averse to being highly risky.
Despite repeated advice counselling him about how the skewed portfolio would hurt him in the long run, Mr. Pradhan stood undeterred. His logic stated, “I have lost too much in the years I have stayed away and now is the time to make up for it.” Over time, his investment approach only became more aggressive and somewhat rightfully so. His mid and small-cap stocks were hitting the upper circuit daily. However, the year, 2008 saw a couple of volatile initial weeks, which Vinay thought to be the period of consolidation. He believed that the market would stabilize pretty soon.
And the end of those initial few weeks, the only trend that dominated the markets was that of spiraling downwards. Vinay’s stocks were down 70 per cent, his gains had been completely wiped out and his capital loss stood at a hefty 40 per cent.
Despite the situation, Mr. Pradhan remained undeterred. His game plan was to buy more of the stocks at the current level because very soon, the value of the stock was bound to rise. While this sounded great in theory, when it came to averaging a blue chip or mutual fund, there was a massive difference. The theory also fell flat when it came to the small-cap segment.
Unfortunately, this is a rather common story when it comes to understanding investor behaviour in the stock market. A few of the common mistakes which almost all investors commit are:
- Not admitting when they have made a mistake. One’s ego should have no place when it comes to investing. For instance, in case you have made a lousy investment, recognize and rectify it. Sell the investment entirely, if it’s shaping up to be a bad one. However, quitting the market entirely isn’t the right move because every market has its good, bad, average and trader-driven stocks. Like everything else, good stocks do survive the market mania.
- Buying equity investments with short-term money. For example, a lot of people take loans to make investments, especially in IPO’s, with the idea of making money on listing gains. However, this doesn’t always happen.
- Embarking on a financial journey without any roadmap in mind. Making investments without taking into account one’s overall financial situation can have grave consequences in the future. Thus, various components such as cash flow, liabilities, insurance, investments, retirement, taxes and estate should be thoroughly studied prior to making any investment decision.
Understanding how these mistakes can affect your chances of a successful financial future can go a long way towards ensuring that future. Thus, to all the Vinay Pradhan’s of the world, I would just to say that, “Admit your mistakes and move on”.