This article is written by Manish Dhawan, well-known as a co-host of the celebrated “Stoic Podcast”. Manish is known for his sharp command on options and risk. Check out smallcases by Manish Dhawan.

Investing and trading, just like life, can teach a million lessons and every one of us can have a unique experience within that sub-set. However, investing mistakes can be divided into two broad categories: technical and psychological. Without much ado, let’s jump right in.

Investing mistakes can be divided into two broad categories: technical and psychological. While the former is relatively easy to rectify, the latter requires you to work on your ego and emotions Click To Tweet

Technical

Technical mistakes are relatively easy to rectify. These sets of problems are objective and therefore have a prescribed solution.

Leverage

Rookie technical mistake #1 is under capitalization. Let’s look at it with an example. You are bullish on Asian Paints. The company has a strong set of earning numbers, the chart is in a long-term uptrend and recently it has given a buy as per your set-up.

You go ahead and buy 1 lot (300 shares) of Asian Paints at Rs. 3,311.

As per your set-up, the stop-loss for this trade is Rs. 3,206. This is the point where you think your hypothesis has gone wrong.

So this trade has defined risk (barring execution risk). If this trade fails, you will lose (Rs. 3,311- Rs. 3,206)*300 = Rs. 31,500.

Now, this Rs. 31,500 should not be more than 0.5% of your total portfolio as otherwise, you run a risk of ruin as per your system’s risk parameters (drawdown, win/loss, etc.).

What it means is that you need a portfolio size of Rs. 63 lakh to trade 1 lot of Asian Paints. Even if your risk parameters are twice as better as the average system, and you can risk 1% of corpus on a trade, you still need Rs. 31.5 lakh to trade just 1 lot.

And therefore, as a retail trader, you should simply stay away from Derivative trading. You DO NOT have the capital to play the game and you are just a meal for a ruthless money bag.

Over-trading

Rookie technical mistake #2 is the absence of a system. 

Before resolving this problem, we need to understand, what a system is. 

“A mechanistic output that tells you what, when, how much to buy and when to sell it”. Without these 4 data points, whatever you are doing is “GAMBLING”.

If your decision to buy is random at best, you will get into murky waters of over-trading, revenge trading, m2m and P&L trading. Analysts will decide what you buy or sell. Your current set of profits and losses will decide how much of it.

It is only a matter of time, a question of when (and not if) you will blow up your account.

“A mechanistic output that tells you what, when, how much to buy and when to sell it” are what set investing apart from “GAMBLING”. Avoid making random moves to stay away from murky waters of over-trading and revenge trading Click To Tweet

Now let’s discuss the Elephant in the room.

Psychological

This is what seperates seasoned investors from novice ones. Once you have ironed out the technical glitches we discussed above, you encounter your biggest weakness/enemy. YOU, yourself.

Your biggest weakness or enemy when it comes to investing is YOU! Ego, a state of mind where you insist that your thinking is correct and the market is NOT, combined with bias, results in investing mistakes Click To Tweet

Ego 

A state of mind where you insist that your thinking (based on logic, reasoning, knowledge etc) is correct and the Market is NOT. This flaw is more evident in investors rather than traders. This intellectual superiority complex gets even more intense in the bull market where your last 2 trades were home runs. Recency bias combined with an inflated sense of self-worth result in this disaster.

Emotions

You know you are breaking the rules of the system and you still do it anyway and then repeat it. This is a deeper problem, which stems from the subconscious mind. It is as if you are not in control of your own actions. Someone pulls the trigger for you.

When it comes to investing, don't let unsolicited news, messages or advisors pull the trigger for you. Else, you could have to take the shot yourself Click To Tweet

Unlike Technical glitches, psychological problems are a part of evolution and could or could not resolve with time.

It is not a coincidence that there are very few successful traders in the world. 

My personal life learning is that unless you are that chosen one, it is much better to deploy systematic, slow compounding systems rather than try to get rich quickly with discretion.

In the end, it’s a journey for everyone and therefore very subjective. Generalized rules don’t apply. You will do what you will do.

Manish Dhawan
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