“When I was young I thought that money was the most important thing in life; now that I am old I know that it is” says Oscar Wilde.
Most people today will readily agree with Oscar Wilde, with a small difference, that money is not the, but one of the most important things in life. Making your money grow larger and larger is the art and science of Investment. One of the most favorite avenues of investment is the stocks and shares of companies.
The stock market gives any of us the opportunity to grow our money at faster than other investment avenues open to most of us. Today, there are millions of stock market investors in India, USA and other countries. Some of them are very successful, but some are unsuccessful. Like in any other profession, stock market investment has its rules for success.
We are talking here of only medium to long term investment, as this is the safest for most investors and we are excluding trading activities in Futures and options in this blog post. We will see them later. Follow these time tested principles – and profit from them.
- Review time : The year beginning – in fact, every quarter beginning – is review time for your Portfolio of stocks and shares. You must be brutally frank in reviewing the investments you made in the year gone by, before making fresh investments in the New Year. Were they the best possible investments? Or, could you have made better investments - with some more info, some more analysis, some more coolness, some more cautiousness or some more promptness? Or, some more resources? What went wrong and what went right? And, why? Learn from your past mistakes.
- Learn from others' Mistakes : It is preferable and profitable to learn from others’ mistakes. You don’t have to commit the same mistakes in your life. Look at what others- including analysts, chartists, experts and friends. What they were saying and doing throughout last year. Where did they hit the dot and where did they miss? And, why? Will they go wrong in similar circumstances in current year? Many people missed the great opportunities of 2009 beginning. Did we not know that economy will again move up, industries will perform again? Was it not a herd mind set to miss the bus, then? Clear up your vision and your logic.
- Determine Your Time Horizon : Fix your time horizon for investment. Is it 1, 3, 6 or 10 years? Perhaps, you want cash back in about 30 percent of the investment in the 2nd year; another 20 percent in the 4th year and balance can remain for 10 years. Your Investment strategy should be planned accordingly.
- Plan the Strategy : Do not make any investment - without a clear strategy! Never make an ad-hoc purchase or sale. Look for growth sectors and leaders therein. Review all national, international, industry-wise and company level factors. Zero in on the top 3 companies in healthy, growth oriented, profitable sectors. As a general principle, go for high growth sectors, and their leaders with reasonable P/E ratios. Future appreciation will be higher in them. Do not Buy a company’s share with a P/E multiple, much higher than the Industry average. “Only buy something that you'd be perfectly happy to hold if the market shut down for ten years” says Warren Buffett.
- Make Your Research : Do not go merely by what experts say. Take their opinion by all means. But, make your research. You be knowledgeable on your investments. But I repeat, listen to others’ opinions and constantly review your opinions – based on any facts they may have. Keep in mind what Warren Buffet says of some experts: “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.”
- Do not put all Eggs in one Basket : Do not put all your money in a single company’s shares, or in a single Industry’s shares, how so ever good it may be. Spread your investment over 5 to 10 good companies, in different industries. For large investments, up to 20 companies also is good. But, if you find great investments in only 10 companies, limit it to 10. Watch your Portfolio continuously. Shuffle them, whenever necessary. If you feel a company has given very good profits, and future rate of growth is likely to be slower, shuffle it in favour of a higher growth company.
- Look for Future Leaders : Some Companies may be either new or small today – but likely to become big in 2-3 years from now. Some of them may belong to excellent business groups with great track record, but may have 2-3 years gestation period. Zero in on such future leaders. These are for long term investment. These could be multi baggers in the long term. Buy such future leaders, when no one is looking at them. They could give you great appreciation in long term.
- Short Term Gains : You don’t need to miss the short term gains on companies which performed lower in last Quarter, but are sure to perform much better in next one or two Quarters.
- Buy Low : Buy on DIPs. BUY on corrections. BUY when market is going down under. Everybody talks of BUY LOW and SELL HIGH. But, very few actually do it. Prices fall LOW because all have deserted market simultaneously. Prices rise HIGH because everybody is simultaneously in the market for buying. Do the opposite of such mob mind set. In the long run, this is the best policy. Be cautious, if a single company’s shares are going down consistently, there may be factors behind such fall, which you need to know.
- Penny Stocks : Penny stocks are cheap stocks, which are selling at face value or less than face value for a long time. There may be some good stocks in them. But, if you are a new investor, or, one with small amount to invest, do not touch PENNY STOCKS. Stay away. If you are a seasoned Investor, research them, convince yourself of its likely rise in future and put a small portion of money in them. No harm.
- Markets Always Fluctuate : Markets are not static. They change every day. Look for the new opportunities. But, do not become elated or morose by stock price fluctuations. These are opportunities to sell or Buy. Not to get exited about or feel morose. As one master says, if you have trouble living with a 20 percent loss in stock prices, do not enter the market at all.
- Market Information : Markets have millions of investors. There is information, misinformation, opinions and whims too in the market. Don’t equate opinions and whims with facts.
- No Debts for Stock Investments : Very, very rarely only, going in for debts to make stock investments can be justified. As a general rule, avoid debts to make stock investments. Debt burden always goes up only. But, stocks can go UP or DOWN also during the term of debt. This rule can be broken for short periods in case of exceptionally good investments.
- Look at Management's Credentials : Constantly keep the management’s integrity and credentials in view while investing. Some managements are absolutely inefficient or lacking in integrity in running their companies and rewarding their investors. Stay away from them, however good their current financials may look! Also, avoid small companies, with small floating stock. It is difficult to sell them. Their price fluctuations can also be heavy.
- Never Bet Your last Shirt : Your TODAY is just as important as your TOMORROW. Keep reasonable part of your income for your normal needs and some for urgencies. Do not invest up to the last rupee on stocks and shares. Your emergencies are important.
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