2 Most Overlooked Investing Mistakes That Could Be Costing You Dearly

This article is written by Manish Dhawan, co-founder of Mystic Wealth and also well-known as a co-host of the celebrated “Stoic Podcast”. Manish is known for his sharp command on options and risk. Check out smallcases by Manish Dhawan.

Investing and trading, just like life, can teach a million lessons and every one of us can have a unique experience within that sub-set. However, investing mistakes can be divided into two broad categories: technical and psychological. Without much ado, let’s jump right in.

Technical

Technical mistakes are relatively easy to rectify. These sets of problems are objective and therefore have a prescribed solution.

Leverage

Rookie technical mistake #1 is under capitalization. Let’s look at it with an example. You are bullish on Asian Paints. The company has a strong set of earning numbers, the chart is in a long-term uptrend and recently it has given a buy as per your set-up.

You go ahead and buy 1 lot (300 shares) of Asian Paints at Rs. 3,311.

As per your set-up, the stop-loss for this trade is Rs. 3,206. This is the point where you think your hypothesis has gone wrong.

So this trade has defined risk (barring execution risk). If this trade fails, you will lose (Rs. 3,311- Rs. 3,206)*300 = Rs. 31,500.

Now, this Rs. 31,500 should not be more than 0.5% of your total portfolio as otherwise, you run a risk of ruin as per your system’s risk parameters (drawdown, win/loss, etc.).

What it means is that you need a portfolio size of Rs. 63 lakh to trade 1 lot of Asian Paints. Even if your risk parameters are twice as better as the average system, and you can risk 1% of corpus on a trade, you still need Rs. 31.5 lakh to trade just 1 lot.

And therefore, as a retail trader, you should simply stay away from Derivative trading. You DO NOT have the capital to play the game and you are just a meal for a ruthless money bag.

Over-trading

Rookie technical mistake #2 is the absence of a system.

Before resolving this problem, we need to understand, what a system is.

“A mechanistic output that tells you what, when, how much to buy and when to sell it”. Without these 4 data points, whatever you are doing is “GAMBLING”.

If your decision to buy is random at best, you will get into murky waters of over-trading, revenge trading, m2m and P&L trading. Analysts will decide what you buy or sell. Your current set of profits and losses will decide how much of it.

It is only a matter of time, a question of when (and not if) you will blow up your account.

Continue to read psychological investing mistakes, the Elephant in the room here.