Zerodha founder's advice on what not to do when your 'favorite' stocks are falling
Investing is risky & there are some important things retail investors should keep in mind, as per Zerodha founder Nithin Kamath
Every time the prices of retail favorite stocks fall, the number of investors who buy the stock goes up dramatically, as per Zerodha founder and chief executive officer (CEO) Nithin Kamath, which has been seen in stocks Yes bank, Reliance ADAG stocks, and now with Zomato.
“In the business of investing, if a stock price is down and it seems like it is a cheap buy, odds are, it will continue to become cheaper. The optimal way to trade is to buy stocks that are doing well and sell them higher as they grow," Kamath adviced in the tweet.
Further, he said to avoid averaging down to reduce one's average buy price in the hopes of making a profit or breaking even IF the price goes up. “Yes, there are times when it works, but the issue with this strategy is that one bad trade is enough to wipe out all previous profits & more."
“We all suffer from Disposition Bias—we feel like selling stocks that are going up and hanging on to stocks that are falling down. To do well when investing, you need to do the opposite—hold on to winners and sell the losers," he suggested.
Advising to mix technicals with fundamentals, he said that a stock that seems cheap at ₹100 for fundamental reasons will seem cheaper at ₹50, tempting to average down. But technicals will show investors if there's a downtrend—a warning sign to maybe not buy, buy less, or exit.
“The most important aspect of investing is to diversify. We live in a world with no status quo. Any company/sector can get disrupted & lose a lot of value. Avoid holding more than 10-20% of any single stock or sector, the lesser, the better. It's still high but better than 50%," Kamath added.
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