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Made a loss? How to bounce back
Deepa Venkatraghvan, Moneycontrol.com
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May 17, 2006 09:34 IST

4285. . .2280. . .5001. . .3604. . .6492. . .8101. . .9403. . .10522. . .11985

No prizes for guessing what those numbers stand for. You've probably taken that Sensex ride in the past to make quick money. But if you're among those who, in that pursuit, burnt their fingers badly and are too wary to jump on to the current joy ride, this may just be the best time to learn from past mistakes.

But again, we are not telling you that this rally is different or for that matter even safer. After all, even the last couple of days have seen a pendulum like movement in the markets.

Certified Financial Planner Kartik Jhaveri warns, "No rally is different. What goes up, must come down and vice versa. Factors driving rallies are different each time, sometimes unfortunately due to scams and other times on business fundamentals, business cycles, economic conditions, political environment, international interest and so on. Boom and bust cycles continue forever. What one must do is follow a disciplined approach and consult professionals not run of the mill agents and brokers."

Moneycontrol spoke to experts to identify the steps you should take to make this ride a pleasant and lasting one.

Step I: Identify your past mistakes

Well begun is half done. So begin with acknowledging your mistakes. Here are some of the common mistakes most people made in the previous rallies:

1. Lack of understanding

Ambareesh Baliga of Karvy Stock Broking says, "People don't pay attention to research. And by research, I don't mean very complicated research. Basic research such as what the company does or how it has been performing would do."

Jhaveri seconds that. He says, "Most people see the stock market as something risky primarily because they don't understand it. People invest on tips. There is very little understanding of investments and the driving element is greed, hence people don't care and just put in their money to make fast bucks."

2. Entering when markets are already high

Jhaveri says, "During boom times by the time people realize that everyone else is making big money in the stock market, its already too late. Most people wake up and start investing when markets are nearing the peak. And unfortunately, they repeat the same mistake in the next boom because everyone seems to say that it's different this time."

3. Investing borrowed funds

Baliga brings out an important point, "Initially, people invest their own funds and when they start seeing returns in a bull run, they tend to go overboard. They start borrowing funds to invest in the market. And when markets fall, they lose money on borrowed funds. That is not a very pleasant situation as the margins on borrowed funds are as it is low."

4. Lack of discipline

Jhaveri explains, "People want to become rich overnight. They want their investment to double overnight. People become irrational and forget that there are no short cuts in life. People who win invest on an ongoing basis and they are the ones who create wealth."

Step II: What are the lessons learnt?

Every problem has a solution. If there is a mistake, there will be a way to solve it. The next step, therefore, is to list down the lessons learnt.

1. Consult professionals or invest in mutual funds

Inspite of the high risk, Jhaveri believes that stock market investments are the best investments money can buy. The only advice he gives, "Consult professionals, they will shield you against herd mentality and irrational behavior of market elements."

Baliga advices, "The markets are at their peak. So if you are investing in equities, I would suggest you opt for large caps.

2. Look at wealth creation in the long run so market levels don't matter

This is easier said than done. And who might know that better than someone who has seen previous rallies. Baliga says, "Its easy to tell investors to stay invested in the long run. But once a southward slide begins, people tend to get panicky and want to exit their investments."

Jhaveri gives us his words of wisdom, "Most people are driven by greed and are plagued with an extremely short vision. If you want to create wealth forget about intra day trading and taking delivery for 15 days. Wealth is not created in a day or weeks or couple of months. One must nurture it and let it grow first."

3. Assess your risk appetite

Baliga says, "In their excitement, people tend to invest more in equities than their risk appetite would permit."

While risk appetite does not determine whether you win or lose, but it determines how you handle the victory or the loss.

The markets are at their all-time highs and this maybe a good time to boost your investing confidence. But do it the right way to prevent heartburns again.

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