In his book ‘Coffee Can Investing’, Saurabh Mukherjea (Founder & CIO of Marcellus Investment Managers & former CEO of Ambit Capital) scripts some common investment mistakes:
1. No clear investment plan: Just like google maps for travel, a financial plan for investing is a must.
2. Trading too much, too often: Repeated trading & portfolio changes can lead to sub-optimal returns.
3. Lack of diversification: Different assets carry different risks & return potential. Diversifying helps to insulate from shocks in a particular asset class.
4. Chasing short-term returns: Most investors chase higher returns or yields without knowing the risk.
5. Timing the market: Markets do not move linearly & are volatile. Hence it is difficult to accurately determine when to enter or exit the markets.
6. Inflation & Taxes: Most investors focus on absolute returns without adjusting for inflation & taxes.
The book further states that equity remains the most powerful driver of long-term sustainable returns. But, investors need to be patient & systematic as equities are prone to extreme movements in the short term. For true wealth creation, an investor has to let a good portfolio stay untouched for a long period. The most difficult part is to neutralize the negatives of ‘noise’ by investing & holding for the long term. As the holding period increases from one year towards 3, 5, 10 years, the volatility (risk) of returns reduces significantly. Ultimately, investment is more to with discipline than “how much” you invest.