How do you distinguish between an investor and a trader? An investor tends to have a longer-term perspective compared to a trader. There is no sure-shot formula to be a successful investor but there are some basic tips that can help beginners to navigate through the rough market waters.
Some useful investing tips for beginners in the stock market
• Always take a long-term view on equities. Don’t hope to make money even in quality equities in less than 3 years. If you are lucky, then returns may come in much faster but you need to give time for the equity story to actually play out.
• Do you have a back-up plan in place? Ensure that because things don’t move your way. So, invest with a Plan-B in place. Plan-B is essential because you invest in a stock with certain assumptions. Plan-B clearly states as to what you will do when the assumptions turn out to be incorrect. Whether you are eventually right or wrong is immaterial. The back-up plan is your insurance against market uncertainty.
• Spend time and do your homework before investing. It may sound a huge task but then it is your money after all. Understand the business the company operates in and its prospects. Know entry barriers and understand competition. Ensure that the financials of the company are about profits and not just about top line and eye balls alone.
• Mistakes are bound to happen in investing. There is no worry in being wrong but don’t stay wrong. It is not a very wise thing to keep holding stocks when they go against you because idle money has a cost. Even the best of investors get a good number of their investment ideas wrong. The idea is not to fall in love with a stock and just move on.
• Averaging your positions is a cardinal sin. If you bought a stock and the price went down by 10%, the normal tendency is to buy more of the same stock to reduce the average cost. Prudent investing says this is wrong. You were wrong the first time and by averaging you are being wrong the second time too. Also, you are increasing your exposure to one stock inordinately.
• When you are right, hold your profits long enough! Imagine that you had bought into Eicher Motors at a price of Rs.200 in 2009. If you had exited at Rs.400 in 2010 you would have still made 100% returns. But that would have been a hugely missed opportunity as the stock is now up by nearly 150 times. Use trailing stop losses or option hedging but try and hold your winning positions for as long as you can.
• Don’t concentrate your portfolio on a handful of stories. You may rightly believe that auto industry could outperform in the next 5 years. But allocating 80% of your portfolio to auto stocks goes against basic idea of diversification. You need to spread your risk. You must not be caught in a situation where something negative like higher interest rates or a Volkswagen fiasco happens to auto. Smartness lies in managing your risk!
• You may be surprised by timing still matters for investors. For example, had you bought Wipro at the peak of the boom in 2000, you may still be sitting on notional losses. Even when you are talking about high quality stocks, the timing can make a huge difference.
• Monitor all your investments in terms of risk and returns through an audit trail. It may sound clerical but you will gradually realize the importance of the same. The best insights into successful investing are available when you look back and introspect on your own trades. An investor has to learn from his own mistakes as it is the cheapest way to learning markets. That is only possible by consistently keeping an audit trail of all your investment decisions.
• Your job as an investor does not end with buying the stock. You need to monitor the company for quarterly results, news flows, institutional action, promoter statements etc. If large institutions are consistently selling the stock, obviously something is wrong and you need to find that out! It sounds quite cumbersome but that is an investment in knowledge and information that you surely need to make.
• Nobody in the market is trying to make you a millionaire and you need to do it yourself. You have to learn it the hard way and that means you have got to pay the price along the way. So be wary of the million-dollar investing idea or that mantra for investing. Nothing of that kind exists. At best, these rules can at beast help you along the way.