Learning by trial & error

All investors make mistakes, but small investors are more consistent than others. They usually get on to the equity bandwagon when a bull run is about to end. They buy stocks on the basis of tips from unreliable sources and pick obscure penny stocks. They sell winners too soon and hold losers for too long. They are greedy when they should be fearful and fearful when they should be greedy.

Delhi-based businessman Niraj Khanna has learnt this the hard way. The veteran, who has been through three rallies and two crashes, started investing in stocks in 2000, a few months before the tech bubble burst. It was a lucky start. He bought Silverline Technologies at Rs 540 and within a few weeks it touched Rs 700. That's when greed overcame reason. Silverline was one of the infamous K-10 stocks and when the tech bubble burst, it crashed to Rs 70. The stock is now trading at Rs 7.

Khanna lost money, but he didn't lose the lesson. Today, he is a wiser investor, who has toned down his expectations and changed his investing strategy. His portfolio is a mix of fundamentally strong companies, which he intends to hold for the long term, and momentum stocks, which he keeps buying and selling for shortterm gains. "I don't wait for supernormal profits any longer. If a stock gives me a return of 10-15 per cent in a month, it's enough and I exit. I can always buy it again," he says. This strategy of booking profits at every rise reaped rich rewards for Khanna in the case of IFCI. He bought the stock in December 2004 at Rs 17 on hearing the news that the government was planning to divest its stake in the financial institution. The stock started moving up and reached Rs 32 in no time. "I kept selling at every Rs 10 move and buying it back at a lower price. I finally exited IFCI at Rs 110 in 2006," he says.

Tulasi Ram, a manager in a Hyderabad-based construction company, also learnt a valuable lesson after burning his fingers with stocks. He entered the stock market at the fag end of the bull run in December 2007 and bought a few stocks on the basis of tips from brokers. As the liquidity-induced rally reached its zenith and his stocks made handsome gains, an emboldened Ram poured in more money. But the markets crashed, and within a few weeks, Ram's dream had turned into a nightmare.

If buying at the peak was a mistake, Ram topped it by selling at the trough. In November 2008, when the stock markets recovered a bit after a gut-wrenching October, he offloaded his entire stock holding and booked a loss of Rs 80,000. Only then did he realise that most of the stocks in his portfolio were obscure small-caps recommended by friends and brokers. The only stock he didn't sell was the one he had purchased on the basis of his own research—MIC Electronics. The company had a healthy order book and cash flow. "This was the only stock I had pinned my hopes on," he says. He bought 2,000 shares at Rs 35, and even though the share price slipped to Rs 18 in 2008, Ram held on. He eventually sold it at Rs 55 and made a profit of Rs 40,000.

Now, Ram is more careful while buying stocks. He buys only blue-chip stocks and aims for long-term gains. "I lost almost my entire savings in speculation. Now my strategy is to hold for the long term. Unless you need the money, don't even look at the market and how your stocks are doing," says the man who once used to aim for 10-20 per cent gains. He now looks for companies with long-term potential. One of the stocks in his portfolio is IRB Infrastructure.

Ram was lucky that he was able to recoup at least 50 per cent of his losses. K.J. Srinivasan, a Gurgaon-based management consultant, lost almost 40 per cent of what he had invested in risky small-caps and unknown penny stocks. "Buying penny stocks was a mistake. While these stocks give quick returns sometimes, there is also a possibility that your investment is reduced to zero the same day," says Srinivasan. He eventually sold his entire holdings in 2008 and booked the loss. Currently, DLF is the only stock in his portfolio.

Srinivasan now prefers to invest in stocks through mutual funds. He has investments in three mutual funds—HSBC Tax Saver, Kotak Select Focus and Religare PSU Fund. "I was not able to find the time to research stocks, so I decided to invest through this channel," he says. Clearly, his losses have not made him turn away from the wealth creation opportunity that equities are.