Since April 2012, I have undertaken the task of trying to beat the market and so far I have failed miserably. In summary, during this period (April 1, 2012 – Nov 8, 2013), the market (represented by the Sensex) has gained 18% while my portfolio has declined 4%. So in simple terms I have underperformed the Sensex by 22% points.
The intellectual and financial rewards of beating the index over a long period of time are extremely worthwhile so I am not throwing in the towel just yet. Here I am trying to summarise what I have learnt from my very costly mistakes over the past year and a half .
1. Sasta roye baar baar, Mehenga roye ek baar : Trying to buy cheap stocks is a losing strategy or at least I am not cut out for it. It is far better to pay a fair price (even a slightly higher price) than trying to buy cheap businesses. Usually they are cheap for a good reason and you usually dont come to know till it is too late.
2. Cut losses early : I lost most money on two positions which I stubbornly held on despite all evidence to the contrary and losses only kept getting bigger. As if to rub it in my face, one of these declared a bonus issue after I exited at rock bottom and the stock has risen 33% from my selling price. I console myself thinking it was the right process but a bad break.
3. You need a side vocation as if you are only concentrating on stocks you will feel compelled to act when doing nothing is the best option.
4. Have clear entry prices in mind for buying. Dont keep waiting for still lower prices and miss out on opportunities. I am guilty of this on several occasions
5. Dont over diversify. If you are buying more than 10-12 stocks, you are probably better off buying a mutual fund.
More later. Would love to know your comments and reactions