5 Things to Avoid in the Current Stock Market

1. Avoid anchors
I hear a lot of people saying that the Sensex P/E at 18x is cheap as it is at the same level as the last few years’ average P/E. Basing your investment decisions on the Sensex P/E can be dangerous, as this is just an anchor that tells us how much people are willing to pay for the top 30 stocks on an average, not whether the stock you are eyeing is cheap or expensive.
Even when the Sensex P/E stands at 18x now, a lot of stocks are trading at 50-60x and a lot at 5-6x, so ignore this number. Also, looking at average Sensex P/E is illogical as the average is artificially higher owing to the bubble of 2007-08.
You must also not give much weight to a stock’s P/E in basing your investment decision. It’s more important to look at the underlying business and whether it is great, good, or gruesome as per Buffett’s standards.
Another anchor to avoid is the stock price itself, especially given that prices have moved sharply in the past 2-3 months.
Remember that a stock does not become a buy/sell just because it has fallen/risen from a certain price.
2. Avoid arrogance
I see a lot of my trader and investor friends feeling a lot better after the gains they’ve made over the past three months.
They are confusing luck and bull market with brains and skill…and would do well to remember that a good performance in the short term has serious limitations as a basis for estimating long term results.
If you are sailing in the same boat, you would do well to remember Charlie Munger’s advice to maintain intellectual humility amidst heady gains…

• Stay within a well-defined circle of competence
• Identify and reconcile disconfirming evidence
• Resist the craving for false precision, false certainties, etc.
• Above all, never fool yourself, and remember that you are the easiest person to fool
• “Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.”

What is more, despite all excitement about Sensex @ 21,000, it’s important to understand that this market is sitting on a much fragile base than when Sensex touched 21,000 in January 2008.
This is thanks to an overdose of cheap money that has inflated bubbles around the world, and especially in emerging market stocks.
When these bubbles will burst is anybody’s guess, but you may call the US Federal Reserve for clarifications, or CNBC office for their predictions.
3. Avoid “cheap” stocks
India has many more zombie companies – sitting on high debt without much cash to survive and without much new business coming in – today than in 2008. So the probability of romancing a value trap is high.
Thus, be very-very careful while buying “cheap” stuff, like stocks at 52-week lows.
Things sometimes get cheap for valid reasons…and cheap often gets cheaper.
So avoid the obviously bad businesses, even if they look cheap.
If you need some hints of what kind of businesses to avoid and what would happen if you don’t avoid them, look at this chart…

Remember what Buffett said – “Time is the friend of the wonderful business, the enemy of the mediocre.” Avoid the mediocre businesses even if they are available cheap (like at <5x font="" p="">
Such businesses are not just terrible investments for you, but also a major distraction that would cost you in terms of opportunity cost.
4. Avoid multi-bagger ideas
I hear that a lot of stock brokers are shutting shop for the lack of business. In fact, as per the SEBI, around 500 brokers have officially shut shop since April 2013. They say “investors are not investing” while they must say “traders are not trading”.
Anyways, helped by this “Sensex @ 21,000” bait, a lot of brokers and stocks tippers are calling me to sell their trading or research services. One is in fact guaranteeing (not on paper) to earn me Rs 1,000 per day in profit!
If you are also receiving such calls or emails where you are promised multi-bagger returns, simply say ‘thank you’ and turn them away.
They may have their targets to meet so don’t scold them. Just say a polite ‘no’.
5. Avoid predictions
Given that the stock market (read, Sensex) has gone nowhere over the past five years, some “sane” minds are pronouncing long term equity investing as dead (again!).
Then there are many who have raised their Sensex targets to 22,000 or 23,000.
Avoid any such predictions. They are just baits to invite you to part away with your money.