7 Common Financial Mistakes to Avoid at All Cost

25 October 2014

7 Common Financial Mistakes to Avoid at All Cost

Greetings from Hitesh! Everybody has liked our last article on Mr.Rakesh Jhunjhunwala and his loss of Rs.550Crs!! Most have appreciated the same and it has become the most forwarded emails so far. Many have requested to talk about mistakes in the field of investments. So, today I am going to deal with 7 common mistakes most normal guys make in their day to day life. Let me start with the mother of all mistake first.

1.  

Mental Accounting:-

This is the mother of all mistakes in real life. Let me share some of the examples.

How many times you bought the things you do not need just because it was offering - Buy one get one free or Buy this and you will get free gift on it or you get married to a girl because you are getting a good dowry or you get married to boy because he is Green Card Holder!! Your son is doing something wrong or illegal – but since he is earning good amount and keeping you properly – you do not stop him from doing wrong!! This is nothing but mental accounting!!

When it comes to share market – this is the most repeated mistake. E.g. you have profit in one share so you think loss in other share is okay / your trade with some brokers just because they are offering you free investment tips / you invested on free media tips and you made loss – you think it’s okay as long as you have not paid for the advise!!

You invested Rs.1 lakh and the value increased to Rs.5 lakhs. Now you lost Rs.5 lakhs – but you calculate your loss as your original investments of Rs.1 lakh!!

You inherited a great property and you lost it – you calculate inheritance as free of cost to you – so actually you consider you have not lost anything!!

2.  Not Taking Action:-

This is another major mistake. You know that Mr.Modi has become PM and India will do better and in turn market will also do better. But still you have not taken part in the market.

Many regular readers tell me that I had told them about the market bull run since 2009/2011 but they did not listen to me!! The saddest words are – “I should have listened to you!!”

Many times you know that your kids are growing older and you will need funds for their educations and marriage – still you do not arrange for the same. When you do not take actions – you go for status quo. When you go for status quo – actually you are going for the reverse effect!! Just think!! You are taking chances in your life!!

3.  Avoidance of Loss:-

You have bought shares and the value has gone down. You know for sure that the things will not improve in foreseeable future!! Rather than taking a pain of booking loss – you hold them.

This leads to blockage of capital and you end up missing on other good opportunities.

4.  Prospective Future:-

This applies to margin finance guys. They bought shares on margin and prices have gone done. They keep on holding the shares in expectations of price moving up some day. They incur three losses -   they pay interest cost / pay for mark to market loss and their capital is blocked or wiped out!!

5.  Confirmations Bias:-

Many times when I tell my clients to invest in a company – they would say they have not listen to the name of the company and feel reluctant to invest!! But if I tell them invest in say A group companies like Reliance group or TATAs.......they would gladly invest and hold it!!

Many times they do selective listening. If I say Buy Xyz above Rs.100 with stop loss at Rs.98......in his excitement to invest – he would follow the investment part and not stop loss part. When price comes to Rs.95, he would call me what to do???

Investment is a game to be played with eyes open. It’s an objective game. But with such kind of selective thinking you end up blaming your luck.

6.  Over Confidence:-

Suppose Media report tells you Mr.Rakesh had bought MCX shares. Now, not knowing anything about MCX, you buy those shares. You do not know why Rakesh has bought / you do not know what is his holding period / you do not know what he will do if the prices comes down by say 50% in coming months – but in overconfidence you buy those shares. After one or two years you sell those shares at loss – while Mr.Rakesh would have been investing at all the levels!!

7.  Money Illusion:-

Suppose you bought a shares and it has moved up by 5% to 7% in a week. You had bought with a tgt of 25% return and holding period of 1 year. But since it has moved up fast – you sell it with a thinking of buying back at later stage!! You end up investing in some other companies by the time the price of the first company comes down!!

Many times you sell at wafer thin profit – hardly taking care of your brokerage and taxes!!

Many times some free tips brokers advises to their client to sell A to buy B. In the process brokers gets their commission but client losses the money in the end!! These are the example of money illusion.

What Next?

I know nothing about you. Just read the above mistakes and if you find that you are doing any of them – just avoid it. You will bless me for life.

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Hitesh Parikh.