“How is the market now ?“

“Is it risky to invest now”

Common questions I hear whenever I meet a new client or someone who knows something about the stock market. 

Recently people are worried about recession without understanding whether it will happen or not in India. 

If you ask someone who is an investor, he will try to find a stock which is good for long term and keep accumulating whenever there is an opportunity.

Here are 9 strategies to avoid in stock market. These are nothing but mistakes. When the market is in a bull rally, nothing will affect stocks. Still you should avoid these mistakes at all time in your stock investment journey.

Also, avoiding these common mistakes which have been made by others can help in saving lakhs and crores of money for you.

1) Avoid trying to find next TCS or Reliance :

The first strategy not to follow is trying to find the multibagger stock every time. Any company will take years of hard work and resilience to be on the top. TCS is wealth creator not just because it is in IT, it is hard work of the group from 1968. They were able to stay ahead of the market when things turned around from late 90’s.

Reliance was just petrochemical company till 2010 and may be in few decades they would have vanished. They made their investment in retail and telecom for the next 10 years, now they are reaping their benefits.

Generally any small company will start growing at rapid pace in the initial few years. Then the growth depends on where they are putting their effort. Are they diversifying their verticals which are unrelated ? The fund management, management decisions etc matters a lot. Here is the major difference between a small cap company with any mid or large cap company exists.

Videocon was one of the good companies and they diversified into unrelated Telcom, real estate, TDH services etc. Finally the company doesn’t exists now.

Financial Mismanagement can happen at any level but for growing companies this is like lifeline. Satyam was great company until one day CEO said that they had fudged financial data to show consistent growth. 

2) “This time it is different”

This terminology is given by Sir John Templeton. When ever you are hearing this phrase then it means something is wrong in the market. Recessions are more common in US market in the last 100 years due to inflation, liquidity, rise in commodities, rise in real estate, mortgage crisis, Tech bubble etc 

Hence it is more easier to understand this phrase as it is derived from this developed economies than to India. In India, we started growing only from late 90’s after liberalization. Till that time we were a closed economy with only Public sector companies in every sector.

In 2000-01 it was Tech companies which was growing up like anything as if tomorrow doesn’t exists. Everybody believed that the next century is only for Tech companies and they cannot fail. Unsustainable valuation had brought down the entire tech companies and stock market to a great fall.

In 2008-09, Mortgage crisis rocked the US economy and the effect was seen across all major economies. Mortgages were rolled out without any backing or real people who is getting these loans. Everyone in Banking industry also believed that Mortgages cannot fail and one fine day everything collapsed. [watch “The Big Short” movie – real story based on the Mortgage crisis ]

Right now in 2020-21, stock market highs are created by easy money in developed economies. Also by the new easy mobile apps like Robinhood in US and Zerodha, Upstox etc in India which made investing in stocks much easier. Across media this phrase “This time it is different” started coming and it has been vouched for knowledge of millennials who are flocking the stock market.

Time will say whether “This time it is different or not”

3) Brand never translates into Big names

I still remember in my first year of Job where myself and my friend were browsing about Vijay Mallya and his growth from Wikipedia. This happened in 2007. He was having Kingfisher calendar & Airlines, F1 racing company, starting with Royal Challengers Bangalore IPL team along with Liquor empire. Heard a lot about Kingfisher airlines for the service they provided for their travelers.

Now in 2012-13, I was new to stock market. This stock of Kingfisher Airlines became less than 30/- Rs and I thought it was a good company to buy and believed in the resilience of Kingfisher after learning Wikipedia about the history of the company. After a few months I realized the biggest mistake I did when he fled India and soon the company went into much bigger trouble which they are not able to recover.

DHFL another big brand promoted by Shah Rukh Khan in media and a darling stock for Rakesh Jhunjunwala fell from its high and brought all its investors to great losses. Financial mismanagement and nexus with many other companies was the reason provided till now. Now the company is put for sale to recover some money and provide for investors.

Café Coffee Day was one of the good coffee chains from Bangalore and across south India. It was growing consistently and created buzz when they got listed in the stock market. After the sudden suicide of the CEO Siddhartha, everything came to standstill for the investors.

4) Buy Low, Sell High

Certain things in life are easier said than being done. One of them is this, “Buy Low, Sell high” in the stock market.  Nobody knows how far this stock price can go high and what will bring down the stock price.

Even the technical advancement cannot trace how far this price can go up as it is driven by emotions. “What If the price goes up after I sell ?” can make you stay invested or invest again. You may know that valuation is high and the market may correct but seeing others you will enter and incur losses.

Before all recessions, the market went up with unsustainable valuations and then fell. 

5) Don’t time the market

If you enter the stock at the right valuation, then you may end up having bigger returns. Here is the problem, finding the correct price to enter and exit. Do the bottom up analysis, check the right valuation and enter the stock. If you can digest upto 20% losses initially then you are good enough to stay in the market for a long term.

6) Don’t buy the stock if the price is high

It can be a good company. It can stay in the market for the next 10+ years with great profits but at present if the stock price is high you should hold on. Hindustan Unilever is one good FMCG company. If you had entered the stock price in April 2020 after the covid fall, this stock had reached its peak of 2487 on April 15. They bought Horlicks which became positive news for the company. All these good news had increased the stock price even after the covid fall. From that April till April 2021, the stock didn’t cross that 2400 barrier for a longer time.

People who entered this stock in last April or may or June had not seen any profit for the next 1 year. So during the rallies, be even more cautious and don’t chase stock price investment based on the economic cycle.

 7) Cash flow is important

Cash flow of the companies are even more important while buying stocks. During the bull market most of the companies will go high and high which may force you to buy. When the rally stops, the fundamentals of the company will be looked into for staying invested.

Avoid companies with huge debt as it may bring down the company in the future. Reliance Power, reliance communication was an example of this debt factor. Infrastructure stocks were the darling of the masses during the rally between 2003-07. After that crash these stocks couldn’t recover from their fall. GMR, Suzon, Unitech, GVK, Jaypee infra, Gammon Infra etc are some of the infra companies which were wealth destroyers in the last decade.

When it comes to banking stocks it is important to look at Non Performing Asset or NPA. The primary role of banks is to give away loans and if they are able to keep those loan recoveries within a certain limit it is good for the survival of the banks.

8) Avoid Regulatory Sectors

Regulatory companies have to go by the compliance factors laid down by the authorities. Telecom, Power, PSU’s are some of the sectors/ companies which are governed by regulatory authorities.

After almost 20 years, Telecom industry is having only 3 survivors with Vodafone Idea, Bharti Airtel and Jio of Reliance . All are having huge debts in their names and every time if there was news of good addition of subscribers or increase in ARPU, it will be followed by need to pay spectrum fees as it is coming up for renewal. Due to the cut throat competition they were not able to command price among the customers.

Indian Pharma companies exports by large to US and hence it has to comply with USFDA regulations. If they issue any compliance warning of letter it will be a red flag for Indian pharma companies as they may not be able to sell that particular product and it will affect the revenue in the next few quarters. So stock price will come down. Another aspect is these pharma companies does research and if they are able to get any new patents then it is like winning a lottery. For the next ten years or so they can control the product as there will be no competition for that drug. On the flip side they need to keep spending on the research so that they are having line up of new products.

Invest in companies which is having high pricing power and pass on any increase in tax or raw material  input cost.

9) Don’t catch falling knife

It was in 2014 and I was watching many companies. Trying to catch the company at right price. One such stock was core education as the stock was stable for almost 2 years and it was in the education field. I thought education companies would not fail with my limited knowledge at that time.

One fine day the stock started falling from around 250’s drastically. Stock was falling and I bought when it was around 150. In the next 2 days the stock came down to less than 100 and I accumulated. I thought it was a good buy without analyzing any news. When it was going less than 50 realized that there is a problem and by that time my money was almost gone.  I sold when the stock came to single digit in a few months.

I shared this story with my friend as we started this investment journey together. Later in 2015, I bought Vakrangee. It was growing from strength to strength. Company was providing financial services to people who are not served by Banks in rural areas in North India. They were expanding their services and all was well. On one find day, the stock price started crashing as it was linked to PC jewellers, Mehul Choksi fiasco. I sold off when I lost 30% of my profit. Still I was in 70% profit. My friend who was watching this stock for long time and he started buying when the stock price came down to less than 200. He kept adding after every fall and total investments in this falling stock was close to 2 lakhs. He was sharing this news with me after 3 months when we met again.

This phenomenon of investing in stocks which are falling is called “Catching the falling knife”.

Have you used any of these strategies to avoid in Stock market in your investing ? please share them in the comment section below.

 Learn more about stock market in my book 1 Page stock market plan