In equities the learning never stops. Assess your goals, finalize your strategy, evaluate your risk appetite and invest wisely. After all it is your hard earned money that you invest to earn decent returns.
Read on. You are not alone. Many of us have felt these anxious moments while investing in equities as an asset class and see our investment getting wiped out or have gone laughing all the way to the bank.
Smart investing requires both time and energy and money as money begets more money. Below are some of my personal thoughts which may be helpful to you for navigating the choppy seas of equity investing. Cardinal principles or time-tested adage:
1.Never borrow money to invest in the equity market:
The first principle is disciplined investing with your own surplus money. Never borrow money to invest in equities thinking of making a quick buck. This never happens.
Like all asset classes, equity investing is all about time horizons, patience and discipline. Making money is harder than losing money in stocks if we don’t have the right approach and patience to hold our portfolio for a reasonably long time.
The pain aggravates if we borrow money and lose it. It is a difficult debt trap we create with borrowed money which does not get broken easily.
Always invest with your own money and apportion only a part of your surplus money for investing in any asset class including equities.
2.Do your homework:
Even if you have a smart money manager or a professional advisor guiding you through the maze of equity investing, it pays to do your own research on the stocks in your portfolio.
All the banks, stock exchanges, financial advisors, boutique investment firms and finance portals have their dedicated sites and provide focused research reports that help you look up the company financials and empower you with information for taking informed decisions for making entry and exit decisions in a particular stock.
These sites also provide regular feed on the quarterly results, opinions of investor fraternity and market reactions to events that are going to affect the stock in future.
A safeguard- surfeit of information also hinders decision making and hence your professional advisor comes in handy at these moments.
Since they make their bread and butter from the stock market, they are bound to invest more time and energy in following the stocks compared to you and me.
Listen to their advice, analyse other information sources and then make informed decisions.
3.Be clear about your market entry and exit strategy:
Entering a stock and exiting it with a purpose helps in defining our investment goals and fix our anticipated ROI (Return on investment).
Momentum play, good earning per share (EPS), low relative share index (RSI) score, future expansion, good corporate governance, low debt may be some of the triggers that prompt you to buy a particular stock.
It could be a mix of technical and fundamental factors that govern your decisions or it could be a single event that may make you enter or exit the stock/s.
A disciplined approach like a SIP (Systematic Investment Plan) in equities is also a good option to explore and is covered under point no 9 below.
4.Choose good companies to invest in:
Invest in companies that have managed their debt well, score high in good governance, display good leadership and have a wise management team.
Companies that regularly pay dividends, have a wide footprint both in the domestic and overseas markets, are well-established and financially sound will be good bets to invest.
The demand for their products and services, brand loyalty and brand image often drive the sales making the investors draw a larger return on the investment.
5.Don’t cap your profits, but definitely book your losses:
Despite the best of analysis, strategies and decisions, you’re are bound to invest in some “market laggards’ or stocks that don’t perform as per your set investment goals.
If you have made a bad decision, don’t just sit and brood, cut your losses, churn your portfolio, go for another stock that is performing well.
By human nature, we fail to cut our losses and keep hoping that the turnaround is going to happen and our price will show very fast.
You can’t restore the freshness in a rotten apple? Another trait that most investors exhibit is to cap the profits soon. The inherent fear that the price will fall prompts us to cap the profits early.
While no one has been able to time the markets, it is only the relative timings that make a Mr. Warren Buffet or a Mr. Rakesh Jhunjhunwala make more money than you and me in the equities market.
Greed is another factor that we need to control and there is only a limit to which a stock can go northwards.
Be attuned to the environment in which the company operates, analyse the technical and fundamentals of the stock and book your profits when you have made decent returns on the stock in line with your expected financial goals.
Since part-time investors don’t have all the time to track their stock 24×7 or don’t have a dedicated research team to provide inputs, you may ask your portfolio manager or equity advisor to do this for you.
It pays to take professional help to maximize your profits in the equity markets.
These are fruits that beckon you in a rising market. Momentum stocks can provide good returns in a short time but also carry the risk of burning a hole in your investments if the entry is ill-timed.
Same is the case with high beta stocks where gains and losses can be phenomenal in a very short time.
Wait and master the game before you invest in high beta stocks. If the urge is high, it is advisable to consult your professional advisor and let him handhold you through the maze.
Invest only if the technical and fundamentals of the stock and the overall market sentiment have been analysed by your good self and you are convinced of the market entry time.
A note of caution, it is good to trade with strict stop-losses in place for such deals.
7.Don’t marry your stocks, divorce them:
It is good to be a long time investor. Day trading versus Investment perspective. Good stocks, when bought and left over a 10, 15 or 30-year perspective, provide you handsome returns and make the power of compounding work to your advantage.
The intrinsic value of your portfolio is not only enriched, but also increases multiple times with bonus shares, dividends and the differential in the share price.
The above said, it is also a good strategy to divorce your stocks at the opportune moment, especially if they are not performing as per plan and investment strategy.
Remember, you had a reason to invest in a particular stock – evaluate the performance of your stocks from time to time and divorce the underperformers.
The longer you stay married to them, the greater will be the separation pangs. Sometimes, if you have achieved your desired goal of 10 percent, 20 percent, 30 percent return on investment from a particular stock and feel that there is not much steam left, sell the same and book profits.
Do some research and park the money in another multi-bagger or hold cash. The notional profits and losses need to be converted into a real one at some point in time.
Good investments are always those that have a reason and perspective. Sticking to your investment strategy and tweaking it with market helps you achieve your financial goals.
8.Buy on rumour, sell on news:
Stocks rise or fall on rumour. This is true as the market is always reacting to news. An anticipated jump in the profits of a company or improved EBITA or a stupendous result just before the AGM are some incentive that propels a stock to new heights.
But believe me, when the event actually happens, let’s say the AGM or the announcement of results, more often than not, profit booking does take place.
It is important to analyse the news at this stage when the event occurs and evaluate its impact on the stocks we hold.
If the market perception is that a particular company is going to announce very good results and the sales or profit is going to increase YOY or QOQ by say x percent, we should take our stance and investment call.
When the actual results are declared, if they are above expectations, the immediate profit booking may happen and short term traders will book their profits.
The stock is bound to come down from its high. This is the time to enter the stock for a longer haul. But if the results are below expectations, they downslide may be sustained for a longer period of time.
You need to again visit point no 1 above to define your market entry strategy at this stage.
9.Systematic investment plans:
The SIPs as they are popularly known are a smart way of investing money in the equities market.
SIPs offer a disciplined approach to investing tin the equities wherein an allocated amount of money is invested in the chosen fund every month over a defined period of time let’s say 2 / 18/24 months.
While you may have to choose from a number of equity schemes on offer in the market, nowadays, it is much easier to select one as most of the historical data about a scheme / stock is available in the public domain.
Your fund manager or the relationship manager from the brokerage house you invest with can also be very helpful in assisting you with choosing the right scheme/stock to invest based on your investment goals.
I have always chosen funds and invested in them over a minimum period of 48 months and believe me this approach has always provided an annualized return of 16-22 percent.
Apart from the money growing, SIPs provide a good liquid corpus to fall back on when you need it.
The fact that the corpus grows or diminishes in tandem with the market, it is advisable here is to watch your portfolio periodically and see the impact of the market fundamentals and technical on your portfolio.
If the equity market is underperforming, switch over to a balanced fund where a major portion of the investment is apportioned into debt instruments and the balance is in equity.
Alternately may go for the pure play debt instruments depending on the market sentiment and trend.
10.“Buy when the market cries and sell when the market yells”
The fundamental principle of making money in the stocks market like any other business transaction remains same – buying low and selling high or selling high and buying low.
Like any sales, your gains are determined by the difference between your buying and selling price. In equities, the right time to buy is often when the shares are available cheap and no one is interested in them.
A tell-tale sign that demand is low and supply is high. When the trend reverses and the demand for your stock go up, it is followed by a rise in its price.
The clear signal for you to sell a stock is when everybody is talking of investing in the stock market including your corner pan-wallah, and you get buying tips from all during your morning walk.
The market is too hot at this moment and definitely in the overbought category. Sell your stocks at a profit and hold cash to invest in fresh equities that are available cheap.
Similarly, when everybody is selling and prices crash southwards, it is time to buy. One off event sometimes, like a BREXIT recently or a rumour provides good entry points in a bull market to catch good quality stocks at a marked down price.
Be a contrarian and make more money- “Buy when the market cries and sell when the market yells”
The above points have been culled from my own experiences in investing in the Equities market over a two and half decade period.
I have seen my portfolio erode by half and also seen it grow by 40 percent. The boats have risen and fallen with the ebb and tide.
The notional feeling of elation or depression is short-lived for an equity investor and becomes real only when one books the profit or losses.
Even after years of investing in equites, I do take help of my fund manager and bank upon the expert research reports from my bank to analyse market news and trends.
Overall I have found the SIP to be a safer route for investing in the equities.
But for the pure thrill and satisfaction of identifying a multi-bagger, a star performer and investing and making money from that stock, I analyse it, seek expert advice, read the newspaper and rely on my instincts to enter the market.
In equites the learning never stops. Assess your goals, finalize your strategy, evaluate your risk appetite and invest wisely. After all, it is your hard earned money that you invest to earn decent returns.
May the force be with you!
If my experience and any of the above investing tips help you to earn a better return on your investment, do share your experience with me on my mail ID: email@example.com