5 Investment Trends You Must Avoid

Who is an intelligent investor? Is intelligent investor the one who never takes a bad decision? No, the intelligent investor is the one whose good decisions outnumber bad decisions. Hence, to become an intelligent investor all you need to do is to keep our investment mistakes to the minimum? In equity investment, incurring losses due to bad market situations is beyond anyone's control, however, most of the times losses happen due to lack of investment judgement. Following 'current market trends' is one of the major reasons why investors lose money.

Here are 5 investment trends which you should avoid.

Buying Big Names (Brands)

This is one of the most common mistakes of the investors. They believe if the company is so big then its stock will also be quite lucrative. On the face of it, this rationale sounds fair, but you skim the surface a little and you will see the cracks appearing. It's true, big companies, known as blue-chip stock or large-cap companies, have an established business, enormous market capital and they maintain healthy dividend payout year-on-year. If your objective is safety then these companies perfectly serve the purpose, but if it is growth then the big brands have little to offer.

There is a reason why big names don't perform. First and foremost, in the course of becoming big, they have already exhausted their potential. Furthermore, it's not necessary that big brands will have profit making stocks. Sometimes stocks are overvalued leaving little or no scope for further growth. However, to safeguard yourself from the volatility of the market, some part of your portfolio should be occupied by these stocks as they are less risky than mid-cap and small-cap stocks.

Penny Stocks

Penny stocks have a low market capitalisation and trade at a very low price, sometimes as low as Rs 1. These stocks are mostly operated and manipulated by the big traders and operators hence they are extremely risky. Investing in penny stocks is a bad idea. It works neither for investment nor for trading. The general idea for people to buy penny stocks is that they think they would buy a big quantity at a lower price and even if the stock moves ahead by few paisa they would earn handsome profit. This is the very idea which induces most of the investors to blindly buy penny stocks. But does this gamble pay off? Just like a gamble, sometimes it does, sometimes it doesn't. It doesn't have any fundamental base or a competent management, it stays afloat at the mercy of the speculators.

Buying Stocks For Price Instead Of Value

This is a popular one. Investors, especially new investors, often commit a mistake of choosing a stock not for its value but for its price. Sometimes price looks attractive but the stock's value may not match its price.

In the bullish market, business media, brokers, fellow investors create such uproar around certain stocks that the gullible investors blindly enter these stock without analysing their fundamentals. When the market is bullish, most of the stocks reach their higher highs. It's not necessary that all these stocks have good businesses and robust management, some get inflated due to mad buying frenzy that overtakes the rational thinking in such situations. And as the frenzy dies down, these stocks correct and restore to their true value.

Your yardstick to buy a stock should never be its price but it should be its value. On several occasions, prices of stocks move above their intrinsic value. These stocks are called overvalued stocks. On the other hand, some stocks which have a high price yet they trade below their intrinsic value. Such stocks are called undervalued stock and they have a huge growth potential. For example, ABC stock is trading at Rs 350 but its fundamentals suggest that it's overvalued while XYZ stock is trading at 700 but the analysis say that its value is way above its current market price. In this scenario, though YXZ's price is higher, buying XYZ over ABC makes sense simply because it's undervalued and has better growth prospects than ABC.

Holding Stocks For Too Long A Period

Make no mistake, long-term investment is the best investment practice. In order to exploit the full potential of a stock one has to hold it for a very long period. But is this theory applicable to all the stocks? Not really, a great deal depends on what stocks you are holding. There are some stocks which offer short-term growth while some offer long-term growth. If you buy a stock which has short-term growth potential and you hold it for a considerably long period, it will reach its peak and bottom-out in your holding period.

There are various factors which affect the performance of the stock. For the retail investors sometimes it becomes difficult to determine the hold period of a certain stock, but stock analysts of the stock advisory firms can help you to ascertain the hold period of the stock while some firms also provide timely entry and exit calls.

Undue Averaging

In the stock investment, averaging can make you or break you. It's a potent tool to maximise your profits but it can also backfire and reduce your account to zero. In some scenarios, investors enter a certain stock and when the stock plunges, either on their own or on the insistence of the broker, investors keep buying the same stock at the lower price. This practice is called averaging. The idea is to bring down the average price of the stock as to bridge the gap between the average price and the current market price. Sometimes it yields results and investors draw handsome profits while on many occasions it goes horribly wrong if the stock keeps dropping quarter on quarter.

It's important to look at your investment dispassionately. One should never lose grip on monetary discipline and emotional balance while investing. The best way to tackle such situations is to use the stop-loss trigger and opt out of the loss-making stocks and invest that capital in the better, more promising stocks.