In my 8 years of investing experience I have done many mistakes which caused me substantial financial losses but in return I learned some invaluable lessons that are now the fundamental pillars of my investing approach. Here are the top 3 mistakes and the lessons I learned from them.
Mistake # 1: Over Concentration - During my initial days of stock picking I used to go overboard on one or two stocks and put all my money into them expecting an imminent explosion in stock prices and my invested capital. I invested significant proportion of my capital into names like Prithvi Information, Lloyd Electric, Paramount Communications during 2006-07. Guess what most of them went burst and are today down 90 to 99% from my purchase price. Though I managed to get out of them without loosing all of my capital but I still had to take more 40% knock on those names. I also had winners in the form of UCO bank, Zensar Tech etc but the gains in them were not sufficient to cover the losses. From then onward however confident I am, a stock never occupies more than 10% of my portfolio.
Lesson and Golden Rule # 1: Diversification equals Risk. Adequate diversification must to manage the risk of a portfolio. Never put all your eggs in one basket until and unless there is 100% chance of things happening in the way you want them to happen.
Mistake # 2: Over emphasis on Multibaggers: With all the sharp edged tools that I collected from popular value investing books, like any budding value investor, I also started my career hunting for multi-bagger stocks that could become 10 fold in 5 years. Small and mid-caps became the obvious choice and with little practical knowledge I started picking small caps stock that could become largecaps in few years. Guess what instead of becoming large caps they became micro-caps :). I underestimated the power of size and overestimated my capability to pick multi-baggers. If a stock is undervalued, it is undervalued for a reason. Until and unless you have thorough understanding of the company and the industry it operates in, it is very difficult to estimate when will it be be re-rated.
Lesson and Golden Rule # 2: Allocate a major part of your capital into well established large-cap stocks which are important for the industry or economy. A small portion of the portfolio can be allocated to small or mid-cap stocks which you believe can potentially become large caps in future but don't expect them to give 1000% return in 5 years. The probability of that happening is 1 in a 1000.
Mistake # 3: Panic Buy and Panic Sell: When a stock is consistently going up and is being highlighted in business channel and news papers every day the urge to get on to the stock is very high and feels like as if all will be lost if I couldn't participate. That happens with every new player in the market and happened with me also. In 2006 almost every day there were some stock that were up 10% in a single day. I did panic buying in two of such stock then - Agro Dutch Industries and CHI Investments. Both of which I had to sell couple of years later at loss after realizing their business potential. During 2008 crash I panicked and sold off my holdings in Hindalco at 50 bucks after reading a report on Aluminium price crash. It went to 250 bucks couple of years later.
Lesson and Golden Rule # 3: Be greedy when others are fearful and vice-versa. That's the famous quote by Warren Buffet and I read that while studying value investing priciples but failed to apply it when it was exactly required. The reason was that I was neither mentally prepared nor financially to make that adverse situation favorable for me. 2008 crash seemed like a bomb explosion that I had never experienced before and I also didn't had any surplus cash to go for bargain hunting as I was fully invested. From then onward I am never fully invested and cash is always a part of my portfolio to catch sudden opportunities.
If you also made any major mistake in your investing career and learnt a valuable lesson from that blunder then please share them with us in comments.