Right after business school, i started investing in equities as I believed it to be ideal for long term capital appreciation. I started with blue chip stocks – first investment being the TCS IPO in 2005 and so on. Over the next one year two things happened which changed my investing outlook.
One, my risk appetite grew considerably, as I saved more and got into a better paying job. Second, I had this network of friends who were finance professionals at stock broking firms. We used to meet up after office hours and discuss on stocks that would outperform in the near future.
Due to these two reasons since mid 2006, I started investing aggressively in small and mid caps based on information within our network. In our group, investing in large caps and mutual funds was looked down upon. Something fit for beginners. We wanted more thrills and of course more profits. We understood the risk of investing in small and mid caps, but with good industry exposure, we were more confident and plunged heavily into this. In fact by 2007, my stock portfolio had 80% of these small and mid cap stocks.
And it worked in my favour. These stocks gave unbelievable returns. 2007 was the best year. On a weekly basis, mid- small caps portfolio was appreciating by around 10%. I was earning five times my salary, purely out of my stock investments. Those were unrealistic times. I even did a stupid thing of throwing a party for my friends on a Friday night, celebrating this success. I forgot that I was spending real money to celebrate something which was just notional. I did not exit from the stocks even when they doubled, except probably once to fund my iPhone purchase.That time i did sell a few shares, other than that, I kept invested.
And then came 2008. It was the first week of Jan. Reliance Infra had an IPO – which was fully subscribed in a matter of minutes. I still remember the image of Anil Ambani preparing for Mumbai marathon being splashed across papers along with the headline of his unbelievable success in IPO.
However soon the inevitable happened. The stock market just tanked. On Jan 21, 2008 the markets fell over 2000 points. This was the biggest single day loss in the history of Indian Stock market. And the world was not the same again. At least the stock markets.
Everything collapsed like a pack of cards. It was such a free fall that every other day, mid and small caps started hitting lower circuits and I could witness my portfolio getting eroded in a scary manner. I was hoping it would stop and recover. Even though I was still in profit, couldn’t believe that I lost so much money which I had amassed. I just could not sell those stocks as I hoped and prayed that it would somehow stop and normalcy would return.
In fact, over the next few days I kept buying more, hoping to average the cost out, just in case the market rises again. But the fall never stopped. In 6 months everything crashed. To give you some perspective there was a mid cap stock called Shiv Vani oil in while I had heavily invested. Had purchased @ 128 Rs in 2006, which went up within the next 12 months to Rs 735 and after the crash in 6 month reached back to Rs 150. Today it’s at Rs 12. I still have few of those in my portfolio.
This happened to all the stocks in my portfolio. It was a painful period for me; personally, as I had saved this capital for my business and was hoping the investments in stock would provide the cushion for the initial years as entrepreneur. I ultimately had to postpone my quitting the job for over 2 years due to this.
I’m sure there were many like me especially from the finance profession, who had invested and lost heavily during the 2008 stock market carnage.
However today when I look back, I don’t regret it. But that episode made me wiser. Yes I did lose money but I did learn some valuable lessons along the way. I was 25 then, I realized that one could capitalize on this learning for the future.
Post 2009, I did not invest much in stock markets as I planned to set up my business in 2011. And the first 2 years i had no time for stocks. It’s only since the last few months I started spending some time to start investing in stocks again, though I remain invested in the market through other asset classes.
So as I begin Version 2.0 of my stock market investment journey, I thought of sharing the three most important lessons I learnt from investing in stock market and losing it all. Hope it’s useful for those who are planning to start investing or have just basic investments in stocks and are hoping to do more .
Lesson 1: It’s Not What Your Buy, but when you sell that’s more important
I had this amazing tip from my friend to buy bulk shares in this oil drilling company. So confident was he of this stock as his source was reliable that he suggested we go all out. We immediately picked up over 2 lac value of shares in 2006. And yes that stock did indeed zoom on news of a Govt Contract being received. It rose by over 30% within two week period. We were all happy and started calculating the profits we’ve made.
And then one day suddenly the stock started falling and within a few days it fell below the original level we invested in. All this while i was merely a passive spectator. I had no clue. I asked my friend what happened. He too did not have an answer. After all we had confirmed information, so what could have gone wrong. The stock went down another 20% below our original cost. And this time I started calculating again – this time my losses. Later I received this call from my friend who said that the investor who purchased in bulk sold it few days ago and booked profits. And guess who was stuck with shares no one wanted to buy.
I have always found a lot of information, tips, reports, dedicated channels with expert who talks about which stock to invest, but hardly any information on when to sell it, once purchased.
According to me, in stock market, it’s all about selling. The trick in when to sell. You can make real money in stocks if you can understand when and how much one should sell. We are all emotional fools. Once we buy something we become possessive of it and not wanting to let go. Selling is in fact more important than buying. Selling is what turns your notional into real profit or loss so it’s a decision which helps you move forward.
So since I am no expert in selling or when to sell there are these two points i learnt.
a) Sell at regular intervals
Yes Warren Buffet says hold stocks forever, but at least I don’t follow this philosophy. For me money made in stock is notional till you don’t sell and reap its benefits. I may be wrong but this is what i believe.
You should work towards earning real wealth. Once you made a reasonable profits on a stock, sell some and realize the gain. Use it to get your investment back. Or buy something you want or go for the holiday you had planned. Don’t wait for too long or it may be gone in a flash. And this applies not just for mid and small cap stocks but even blue-chip stocks whose value eroded when markets collapsed for no fundamental reason. Markets are not rational in short term so remember to always sell at regular intervals.
Yes some may argue if you hold on for many years you will get higher profits. But not necessarily. I had NTPC since listing days and in 2010 it was around Rs 220 and today its at 145. Since you cant really time if you had sold it some time back you would have gained more.
Like Systematic investment plan you should have a systematic withdrawl plan for stocks
b) Sell when stocks are in free fall
Don’t hope for a miracle with dead stocks, sell them and move on to something else. And quickly. The more you see or hold on to dead stocks the more it effects your mind negatively. If you have made mistakes accept and move forward.
Lesson 2: Spread Your Risk
Even though my group looked down on those who invested in blue chip stocks and mutual funds, I secretly did invest in mutual funds. Because I always believed in having a balanced portfolio. And this was the single most important reason that saved me from absolute disaster.
I had invested in 4 SIP’s Mutual Fund during this period. Although as a percentage of my total portfolio, this was about 30% during peak time, it then rose to 70% after the crash. Interestingly stocks gave me around 120% return during the peak as opposed to 30% from mutual funds, however immediately post crash it was around 2-3% from mutual fund and -50% from my stocks! I get scared to imagine a scenario if i had no investments in mutual funds at that point.
You cannot bet on any one asset class, its best to invest across different options and stay invested regardless of the outcome. Some asset class will outperform for a certain period and under perform at other times. Balanced portfolio will always help you avoid the extremes and help you with realistic and reasonable returns. Even though I stopped direct stock investment post 2009, I continued to invest in mutual fund, bonds, and gold funds during this period and they have offered decent returns.
Lesson 3 : When it’s very bad, it’s probably a good time.
There is always an opportunity when the markets have crashed as it could go only up from there. Yes it’s difficult to know the bottom but when the markets are going down you can start investing in small portions like SIP. But don’t bet heavy though, remember don’t be greedy. But this will surely go a long way to provide handsome returns when the market turns positive. And then don’t forget to sell!
Lastly let me tell you even if you read the above point 99% of us (including myself) will repeat the same mistakes since you seldom learn from others failures. It’s only when you fail yourself is what makes you wiser. Having said that, some of the things like selling regularly, spreading your risk and investing when markets are pessimistic can definitely be implemented and it will help create a great base for wealth creation
All in all there is no doubt that investing in equities would provide you the biggest appreciation over a long term. Though all of that requires is a bit of self discipline and patience.