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Five stock investing mistakes you should avoid during a bull market

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Key Highlights

  • It is often seen that retail investors after making four-five profitable trades get into risky arena of margin trading and derivatives trading.
  • In margin trading the investor puts a small amount and the broker allows the client to take 4-5 times exposure on the investment value.
  • Not booking partial profits in a bull market is a common mistake that retail investors commit.

New Delhi: Many new retail investors have opened demat accounts over the last one year in order to make money from the bull rally in the equity markets. However, it should be noted that retail investors are very much prone to commit mistakes in a bull market that can cause irreparable damage to their portfolio. Here are five most common mistakes which retail investors should avoid during a bull market.

Buying the hot sectors

Retail investors investing directly in stocks during a bull market should specifically avoid investing in a particular sector that has already seen significant upmove such as the pharma and IT sector as of now. Even they should avoid investing in sector-specific funds, which have already delivered good returns. Ideally, investors should invest in a sector that has underperformed the broader markets so far but is expected to recover soon. If you do not have the expertise to pick such a sector and stocks in that sector, then it is better to invest in index funds or well-managed diversified funds.

Shifting completely from mutual funds to direct stocks

There are many retail investors who, after making money from a bull market, think that they have got the expertise to invest directly in the stock market, hence they completely switch their investment from mutual funds to direct stocks. This is evident from the sudden spurt in the number of demat accounts in the country. However, one should know that every bull market is followed by a bear market and an experienced fund manager can only minimise portfolio drawdown well in a bear market.

Retail investors typically burn their fingers in a bear market as they mainly invest in mid-and small-cap shares, which correct more than the benchmark index in a bear market. 

Chasing high-priced IPOs
Many promoters and early investors in private compaies are taking benefit of the bull market and are coming with initial public offerings of their shares at exorbitant valuations leaving nothing on the table for investors. Retail investors should stay away from those issues ans there have been many instances in the past where retail investors have burnt their fingers by investing in IPO of companies at peak of the market. For instance, Reliance Power, which came out with its IPO in 2008 when the bull market was about to peak out. IPO investors in that company could never recover their IPO investment.

Worth mentioning here is that in the current October December quarter IPOs worth Rs 80,000 crore are set to hit the primary market. Investors need to be extremely cautious while applying to those IPOs.  There are some simple rules that investors should follow in order to avoid the losers. First, invest only in IPOs from top-notch merchant bankers. Second, avoid issues where the money is not being raised for expansion of the business, but by promoters or early investors by reducing their holdings. Third, avoid companies with high debt.

“Corporate governance is very important. Investors should avoid IPOs from promoters who have delisted their companies earlier at lower prices and coming back with IPOs at higher prices,” Et Wealth quoted Daljeet Singh Kohli, CIO, as saying.

Investors should also compare valuations with listed companies from same industry. However, this is difficult when the issue is of unique players such as Zomato or Paytm.

Resort to leveraged trading and intra-day investing

It is often seen that retail investors after making four-five profitable trades get into risky arena of margin trading and derivatives trading. In margin trading the investor puts a small amount and the broker allows the client to take 4-5 times exposure on the investment value. In margin trading, if the price movement favours the traders then he makes huge money. But in case, the price movement happens in the opposite direction than what the trader had thought, then the trader tends to lose his entire capital. So it is never advisable to get into leveraged trade in a bull market.

Recently, Sebi has increased the margin requirements for day trading, so the trading interest in futures and options (F&O) segment has shot up. Worth mentioning here is that the F&O segment is much riskier than intraday margin trading.

Not booking partial profits in a bull market

A common mistake of retail investors is not booking partial profit in a runaway bull market. As the markets rise, the risk perception of the individual undergoes a change. Change in the risk profile is a common phenomenon during bull and bear markets. The same person who avoided risk during bear markets usually takes high risk during bull markets due to high historical returns. For instance, 5-year SIP returns are already above 20% mark (see graphic). It will be foolish to expect similar returns in the coming years.

Though experts ask investors to be greedy in bear markets and fearful in bull markets, most investors do exactly the opposite and lose money when markets fall all of a sudden. It may be noted that when a big fall in the market occurs, you will not get a chance to book profit and exit. So it is always advisable to book partial profit when markets are witnessing exuberance and shift the money to safe investments like fixed deposits so that when markets fall you can again re-enter at low levels.