"Every time the prices of retail favourite stocks fall, the number of investors who buy the stock goes up dramatically. We saw this with Yes Bank, Reliance ADAG stocks, and now with Zomato. Investing is risky & here are some important things retail investors should keep in mind," The CEO of India’s largest stock brokerage platform Zerodha Nithin Kamath noted in the first tweet in a series of six.
Recently, the stock price of Zomato tanked 18 percent in the last 2 sessions as the one-year lock-in period for promoters, employees, and others end. The lock-in period for the stock usually ends after a year of listing. The stock of Zomato was listed on BSE and NSE on July, 23. However, after the steep decline, investors started buying as the stock recovered a bit and rose 4 percent in trade today.
Kamath cautioned that 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, he tweeted.
He further advised investors to avoid averaging down to reduce your 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 and more," warned Kamath.
In another tweet, he stated that 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 noted.
Another major piece of advice Kamath tweeted was to mix technicals with fundamentals.
"A stock that seems cheap at ₹100 for fundamental reasons will seem cheaper at ₹50, tempting to average down. But technicals will show you if there's a downtrend—a warning sign to maybe not buy, buy less, or exit," he explained.
Finally, Kamath stated that 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 percent of any single stock or sector, the lesser, the better. It's still high but better than 50 percent," suggested the Zerodha CEO.