Large, well-known companies seem safe, which is exactly why investors become careless with them. Many who buy IT Stocks assume that a famous name guarantees returns, and they skip the homework they would do for a smaller business. Someone who glances at the HCL Share Price once and decides to buy based on a friend’s remark is deciding with very little evidence. This article describes frequent errors and how to avoid them.
Mistake One: Confusing a Good Company with a Good Price
A great business can still turn out to be a bad buy at a high valuation. Markets can get ahead of themselves, and future returns can be mediocre despite stellar performance.
Compare valuations against the company’s own ten-year history and similar companies. If it is significantly above historical averages, either wait or buy in small amounts
Mistake Two: Not Accounting for Currency and Global Demand
With a majority of revenue being generated from overseas clients, rupee value and their industry’s health have a direct impact. A change in either can impact results, and those who ignore it will see their stocks underperform.
Follow the commentary of management on the frontiers of demand, and recognise the contribution of currency changes to margins. A significant part of the increase could be artificial.
Mistake Three: Chasing Recent Performance
It is human to want to jump on a bandwagon, but the window to do so is usually closed. While most of the positive news has been priced in, there could be more, but it is by no means a given.
Set a rule for yourself to not buy a stock in the next couple of days after a significant move. Buy at consolidations, or spread out purchases over a period of months.
Mistake Four: Overconcentration
It is easy to get drawn into a space because you are comfortable with it, or because it has delivered consistent results. But a downturn in the sector will impact your entire portfolio, no matter how well diversified it is.
Decide on a sector concentration limit – say a certain percentage of your portfolio, and switch out holdings when you exceed it. Always balance technology with banking, consumer goods, healthcare and infrastructure.
Mistake Five: Disregarding Financials
Many investors examine charts, and not much else. But there is a lot more to glean from revenue growth, operating margin, free cash flows, client concentration and attrition.
Take the time to read the quarterly results and management commentary. Understanding these will educate you and improve your investing. Set aside an hour a quarter to do so.
Mistake Six: Getting Emotional About Results
It is common for scrips to fall on the back of great results, and rise on the back of poor ones. Unrealised gains and losses can tempt you into selling or buying due to emotions.
Do not act on the day of the results. Wait for a day or two and read up on the detailed numbers and commentary. If your rationale for holding the stock has not changed, there is no need to sell.
Mistake Seven: Using Borrowed Money or Emergency Funds
Liquidity is important, and you should always have an emergency fund. Using such a fund to invest ties up money which could be needed in the future, and goes against the principle of having it.
Avoid investing with borrowed money as you will be required to sell during downturns to offset losses, and it will add to your costs.
Mistake Eight: Acting on Tips
The internet and chat forums are rife with tips, but many come from dubious sources. While some might be well-meaning, others could be outright fraudulent.
Always verify information before acting on it. Check the filings on the stock exchange and company websites, and consult a SEBI-registered advisor to help you.
Building Better Habits
Document your rationale for buying, selling and holding. Have a minimum investment horizon, and diversify your holdings. Learn from your mistakes, and document them.
