Sunday, December 30, 2012
TEN GOLDEN RULES FOR INVESTING IN STOCK MARKET - PART.1
TEN GOLDEN RULES
FOR INVESTING IN
1. Know the Market
2. Invest in Knowledge
3. Trading vs Investing
4.Time (&Price) to Buy -and- Time (&Price) to Sell
5.Value Investing vs Growth Investing
6. All Eggs in one or How many Baskets?
7. Penny Stocks
8. Holding on to Duds
9.Investing in Life vs Investing in stock
10. When to get out of Market finally
Stock Investment is both an Art and a Science. It is a science – because there are standard methods of predicting the Future Quality and price of a stock. It is an ART because, no such predictions are 100 % accurate.
Some Investors have become billionaires by regular stock Investing, by adhering to the standard Rules of Investing Plus a Little help from GOD, which we call “luck”. I won’t say that luck favours only the Brave. Actually, luck favours the Intelligent, Brave man. Therefore, as stock Investor, be prepared to be intelligent and brave.
The first question that arises in the Market is already answered. Who can invest in the market? Obviously, the intelligent brave man only is fit to be a regular stock Investor. You must be Brave because REWARD is always proportionate to RISK. You must be able to assess the RISK factor clearly – and prepare yourself for it. You must be INTELLIGENT because, RISK can be MINIMIZED or even ELIMINATED almost completely by the INTELLIGENT man. Therefore, the INTELLIGENT-BRAVE man – wins in the market. The Golden rules of stock investing essentially indicate (i) How to be Intelligent and (ii) How to be Brave – and win in the market. Now – let us go on to the 10 Great Rules of investing and winning in the stock Market:
1. KNOW THE MARKET :
By Market, we mean the Indian Stock market. This is the only market (in India) where you can BUY or SELL stocks and shares. You should not attempt to BUY or SELL outside the stock Market. The stock Market comprises of several stock exchanges – but the most important of them in India are BSE and NSE. The other stock Exchanges are becoming UNIMPORTANT due to various reasons.
Certain commodity markets are now being authorized to trade in stocks and entering into such stock trading. Likewise, the stock markets may in future also seek to trade in commodities – thus obliterating the difference between commodity markets and stock markets. All the rules that we are considering here essentially APPLY TO stocks and shares– and to some extent, Mutual fund schemes and Debt Instruments. Commodity Markets follow certain other Commodity specific Rules.
Within the stock market, there are two segments – Equity Market and Debt market. We are concentrating here on Equity Market, though, every stock Investor must also have some understanding of the debt Market.
Within Equity Market – there are again 2 segments. In lay man’s language, we may call them (i) Investing ; and (ii) Speculating. To Quiz on words, Investing is long term speculation; while speculation is short term Investing.
These 10 Golden Rules here basically apply to LONG TERM INVESTING or just, INVESTING, as we popularly call it.
Now, the question arises - how long is LONG TERM? The likes of Warren Buffet, admittedly the most successful Investor in stock Markets, thinks that LONG TERM must at least be 10 years, and probably life-long. Our own Indian Warren Buffet, who doesn’t admit to being so, Mr. Rakesh Jhunjhunwallah, also concurs with this. Most successful Investors concur with this definition. What it means is – make all possible, necessary calculations to project the stock’s future, assess its long term prospects, and if you are satisfied with the prospects, INVEST in it. Once you invest in it – keep yourself invested in it for at least 10 years. I also agree with this philosophy – in general, but, with some precaution – as you will see in the other rules. Now, know the market – really means, know how the market functions.
There are very good Books on the subject, and the NSE /BSE publish lot of material on the subject. NSE also conducts some wonderful, highly educating examinations on many subjects relating to the stock market and awards certificates on passing certain number of examinations. You can get qualified as NSE Certified Market Professional. The writer here is NSE certified Market Professional – Level 5, which is presently the highest certification in this category by the NSE. Readers, who want to be serious stock investors, too can attempt these exams, or if not, at least acquire a minimum knowledge about the functioning of the Market.
Assuming such a knowledge of the Market, Your next, first requirement is – open a DEMAT ACCOUNT with an authorized stock Broker. The Demat account is linked with a Bank account on one side and a Trading account on the other. Some Brokers like the ICICIDIRECT.COM allow you to open all the three accounts with them at one go and link all of them very efficiently. You can then, BUY or SELL shares, as effortlessly as you can bat your eye lid.
Knowing the Demat account operation is easy, effortless and transparent. I do not want to bore you, telling how high technology has made the stock Investors’ life a heaven – compared to the HELL it was, when this technology driven operation was not there.
But, if you are not confident of making your BUYs and SELLS, on your own, you can still go through your Broker, tell him manually what you want, even ask for his advice and then let him to do the BUYs and SELLs for you. Even then, it is a one-click operation – and you can still do it through your Broker. Just make a call to your chosen Broker. Many Banks today are stock Brokers. Many private firms are also efficient stock Brokers and they may tender stock related advice also to you.
Whatever may be your age – 20 or 90, I would advise you to become a LONG TERM INVESTOR in stocks. Like in marriage, it usually pays well to CHOOSE WELL & STAY LONG in the stock market.
Unlike, other forms of wealth, like housing, land etc – stock investment is a HIGHLY LIQUID investment. After Money, this is perhaps the most liquid Investment. Any time, you can convert your stocks back into money or into any other stocks – or- if you so choose, buy any other assets or spend as you like. Your Investment in stocks is (almost) as good as Liquid cash, as far as liquidity is concerned and it can earn much more than liquid cash can in a Bank deposit. In less than 4 days, you can convert your stocks into LIQUID CASH.
2. INVEST IN KNOWLEDGE
This follows from the first rule, Know the Market. How do you invest in knowledge? A regular, long term stock Investor must regularly subscribe to at least one Economic News Paper. He must read things of interest to him on daily basis. News relating to the economy, the market and the specific companies you invest in and the Potential of many other companies – will all figure therein. You need to monitor them. Over a period, an investor turns into a good stock analyst.
The Internet provides a wealth of knowledge on each stock and on the Market. Daily spend some time on it. This knowledge makes you intelligent and that itself is a great benefit for you. It gives you great happiness to know that you are really intelligent. Organizations like NSE, SEBI and reputed brokerages like ICICIDIRECT conduct periodical stock related training programs. You can participate in them – which makes you much more knowledgeable. These are your Investment – not your expenditure.
But, if you have no time for pursuing such serious study – you can still invest in stocks through MUTUAL FUNDS. But, even a mutual fund investor must try to know the past performance of such mutual fund schemes. Many people have burnt their fingers in MF schemes – by not understanding the costs, specialties and benefits of each scheme they are investing in.
While a General stock Investor has varied options to invest - and can get in or get out of any stock at his chosen time, the Mutual Fund investor’s options are highly limited. A few schemes allow you to get out at certain times, but, some schemes have to run their full course and you are bound to them till the end. The returns on certain schemes are reasonably GOOD. But, the returns on certain schemes turn out to be even negative. It is therefore advisable that even a MF Investor must study the past performance of similar Schemes of the FUND – and then choose a scheme with the aid of an expert. Some Fund schemes are manned by real Experts who devote sufficient time and effort for studying the market and investing in the right scrips at the right time. Some are just paid employees whose motivation levels for such study may be LIMITED. Such schemes usually offer less returns.
Know that, as a mutual fund Investor, you are an INDIRECT INVESTOR in stocks, shares and debt instruments. Your Fund Manager invests your money on your behalf in the stocks / debt instruments which he chooses. You are actually choosing your FUND MANAGER, not the stocks / debt instruments. Your FUND MANGER acts as the Expert. Is or isn’t he the EXPERT he claims to be, is what you need to understand by the past performance of the schemes he manages.
3. TRADING vs INVESTING
Having opened the Demat account with a stock Broker, you now have varied options to choose your Investing style.
PRIMARY MARKET : You can stick to PRIMARY MARKET stock/ debt issues, which are issued by companies directly for Public subscription. If the price is right, and the Company is Good, you reap immediate Benefits on allotment in terms of price appreciation. But, if the price is high and Company is not good – You will lose your investment significantly on allotment, as price falls in the market.
This means – you must study the prospectus of the company, the opinions of expert analysts on both the pricing and the prospects of the company – before investing in it. Of late, Government of India has been issuing GOOD SHARES at reasonable prices. If it repeats such methods in future also – it is advised to invest in the Government issues.
Private companies have adopted BOOK BUILDING PROCESS to assess the reasonable price – but quite often, the Book building process seems to boost the prices beyond reasonable price levels. Therefore, most private companies issue shares to RETAIL INVESTORS like you – at a discount to the price arrived in the Book Building Process. Yet, you must study the expert opinions on the prospects of the company and the pricing – before you invest in Primary issues. Book Building Process does not seem to arrive at a correct market price.
The final allotment of shares to you as the applicant, may not be FULL; i.e., to the extent you asked for. It may be corresponding to a RATIO fixed for distribution to all the applicants.
TRADING : Trading generally connotes investing for very short Periods of time. There are several instruments for trading like OPTIONS, FUTURES, BTST and so on. In general, Trading requires that you know current STOCK MARKET factors which are moving the market prices at this point of time, very precisely. You can trade on stocks or Indexes (Indices). The factors that influence them TODAY may not be valid after a few days. Trading does not depend on the long term performance of a company’s stock. It depends purely on short term price movements, which depend on multifarious factors.
In 3 years, a company may be doomed to closure. But, furious trading (BUY and SELL) will still occur in it till the date of its closure or till trading in it is banned by the exchange / SEBI. People get in and get out of trading at times they choose or choose trading options of 1,2 or 3 months. In Trading, one thing that needs to be understood is – for every trader who feels, the price of a stock or Index will go up in the time period he chooses for trading, there is another trader who feels that it will go down during the same period! Only one of them can be right. Both cannot be right. TRADING is generally for FULL TIMERS in the market – who can watch the price movements and the factors moving them – regularly, throughout the Day, every day. It is therefore not for every stock Investor. Also, the parameters to be monitored for Trading are more complex. It is generally believed by successful stock Investors like Warren Buffet that INVESTING is better for most people than TRADING.
INVESTING :- INVESTING depends on 2 factors – (i) company performance and (ii) economy performance. Even if a company is down today – an INVESTOR can perceive the BEST OPPORTUNITY to invest in it TODAY.
With his study and knowledge – he knows that the company’s future is bright and therefore, its stock performance, say, after 3 years could be FANTASTIC. The returns could be as much as 100% to 3000% too. If some adverse circumstances crop up in future, the Investor will know of them, generally well in advance, and can get out of the stock well in time. If an Investor does not keep track of such developments, he is obviously not adhering to these GOLDEN RULES.
In Investing, it is not necessary that a seller should feel bad about the stock that he is selling. He need not feel that the stock price will go down in future, for selling it. He may have achieved a target price and sufficient profits in it and may have spotted another better opportunity of the present or future and is therefore selling.
The BUYER too may be right, since his perception of the stock is that it will grow a lot further. In fact, Both BUYER and SELLER may have similar perceptions about the stock growth – and yet the SELLER sells, since he has kept it for several years already and has reaped rich benefits from it already. He is satisfied and has other reasons to move on to other stocks or to turn the investment into cash. In the view of many reputed Investors, INVESTMENT is a much less risky activity for most investors and highly profitable.
Continued in PART-2 ...At the URL :