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Wanting too much too fast: Not comprehending risk

Wanting too much too fast: Not comprehending risk

Gopal Krishna Murthy realised the downside of F&O when he lost Rs 18,000 on a margin call. “I was carried away by the possibility of making big gains on a small investment,” he says.

Gopal Krishna Murthy of Vijayawada is a seasoned investor. Equities, mutual funds, real estate, fixed deposits…they all find a place in his portfolio. But as his investment surplus increased, Murthy began relying heavily on his broker. “It worked fine till I was involved. But once I started to depend on intermediaries to manage my portfolio, it went all over the place,” he says. The relationship manager at his brokerage firm dangled the lure of quick profits in futures and options (F&O) and Murthy shifted from delivery-based investment to speculating without understanding or realising the potential risks. In the cash segment too, Murthy’s investments are in the red. He bought IFCI shares at Rs 95 but didn’t sell even after they appreciated by 30%. His relationship manager insisted that the stock would double in value. It is now down to Rs 47.

Murthy is one of the thousands of investors who have turned traders thanks to the four-year bull run. “There is a huge difference between a trader and an investor; an investor needs to define a time frame for an investment, whereas a trader looks at profits,” says Manish Shah, associate director, Motilal Oswal Securities. Market experts see no room for confusing the two. The basic tenet of investing is to stick to asset allocation. This is a simple rule, but it’s difficult to follow because most investors get carried away by the prospect of earning 100% or more. In their greed, they forget that the stock market functions on a risk-reward equation; the higher the risk, the higher the return. That the reward can be negative is a fact that most players simply don’t seem to comprehend.

Inflation, crude oil prices, interest rates, FII investments, currency exchange rates and global risks add to the stock market confusion, and sometimes even a professional investor finds the going tough. Most investors would rather trust an intermediary than go beyond the basics and learn about the new risks associated with their investments.

These risks will ultimately affect their financial goals and plans. Those who enter the stock market without understanding their risk profiles will not be able to invest in instruments that best suit their needs.

Another common mistake that investors make is to buy and forget. It’s important to track your investments regularly and book profits to gain from them. Remember, investment calls for discipline and patience. Blindly following what friends, colleagues, even overzealous brokers and relationship managers recommend, could lead to greater losses than you are willing to bear. It’s your money at stake and you’re the one who has to deal with any losses.

Gopal Krishna Murthy
Gopal Krishna Murthy, 36


He realised the downside of F&O when he lost Rs 18,000 on a margin call. “I was carried away by the possibility of making big gains on a small investment,” he says.
 Solutions

• Understand the risk-reward equation for any investment that you make.

• Do your homework. Read investment reports and then invest. Relationship managers can be a good source of information.

• Rebalance your portfolio at least once a year. Review your asset balance twice a year.

 

HOW TO PROFIT FROM THE MARKET

R.K. Gupta
R.K. Gupta, Managing Director, Taurus AMC

Discipline and greed are the two main factors that help make or lose money in the stock market. I know that while I have the discipline to pick the right stocks, I get carried away by greed when I see a rising stock and end up losing money. That’s mainly because rather than selling my stocks at a price sufficiently higher that the price I had bought them at, I have held on, hoping for the price to rise even further.

This is what happened in the case of the Adlabs shares that I bought. I purchased the stock when it was at Rs 450 and watched it touch a high of Rs 1,500. But instead of selling at that point, I held on hoping it would go even higher. However, it began falling, and I realised I had to sell before I made a loss. I finally sold the shares when the price was Rs 750.

It was a similar story with Reliance Infrastructure. I bought the stock in April 2007 when it was trading at Rs 550. It climbed steadily to Rs 3,000, but I held on hoping the price would go even higher. Today, the stock quotes at about Rs 950.

The only good thing to come out of this is that I know I’m prone to this error. I am now devising ways to have a profit-booking mechanism in place. I hope this will instil the same discipline in selling the stocks as I have in selecting them. It will certainly help make my personal investing more profitable.