- The First Major Axiom: ON RISK Worry is not a sickness but a sign of health.If you are not worried, you are not risking enough.
- The Second Major Axiom: ON GREED Always take your profit too soon
- The Third Major Axiom: ON HOP When the ship starts to sink, don't pray. Jump.
- The Fourth Major Axiom: ON FORECAST Human behaviour cannot be predicted. Distrust anyone who claims to know the future, however dimly.
- The Fifth Major Axiom: ON PATTERNS Chaos is not dangerous until it begins to look orderly.
- The Sixth Major Axiom: ON MOBILITY Avoid putting down roots. They impede motion.
- The Seventh Major Axiom: ON INTUITION A hunch can be trusted if it can be explained.
- The Eighth Major Axiom: ON RELIGION AND THE OCCULT It is unlikely that God's plan for the universe includes making you rich.
- The Ninth Major Axiom: ON OPTIMISM AND PESSIMISM Optimism means expecting the best, but confidence means knowing how you will handle the worst. Never make a move if you are merely optimistic.
- The Tenth Major Axiom: ON CONSENSUS Disregard the majority opinion. It is probably wrong
- The Eleventh Major Axiom: ON STUBBORNNESS If it doesn't pay off the first time, forget it.
- The Twelfth Major Axiom: ON PLANNING Long-range plans engender the dangerous belief that the future is under control. It is important never to take your own long-range plans, or other people's, seriously.
You will find many investors entering the market at high levels and making a quick exit as the market witnesses a correction. Unfortunately, such investors seldom think of investing in stocks again. Thus, they ignore an excellent opportunity to earn above average returns.
In short, investing in equities can be a difficult proposition for retail investors. However, equity must form a part of every investor’s portfolio. The proportion could vary, depending on the investor’s age, monetary requirements, risk appetite, etc.
To cope with volatility, it is important to have a disciplined and systematic approach to equity investment. Set your own rules and more importantly, follow them religiously. Indeed, the mantra for successful equity investment is a well thought-out, disciplined investment strategy.
A long term monetary commitment, adherence to discipline in investment and decisions based on company fundamentals are essential ingredients for successful equity investment.
Here are golden rules for safe equity investment, which could help you to sail through different market scenarios
1. Be a long term investor
This is the first and most important rule of equity investment. Timing the market - entering the market at low levels and exiting at higher levels - is almost impossible. Though often heard on the street, this strategy is difficult to implement, as it is nearly impossible to gauge when the market has peaked and when it has bottomed out. Do not play the guessing game; it is more sensible to put money into the market with a long term commitment.
Trading or speculating seldom helps in equities. You could make quick bucks by trading in 10 deals, but you could lose whatever you have earned in just one deal. This is the risk you take when you try to trade and make easy money from the stock market. Apart from incurring financial losses, it also involves a lot of mental stress. Trading could give you sleepless nights.
Globally, economies follow seven year business cycles of boom and bust. Thus, when you are investing, invest for a fairly long term, say three to seven years. Indeed, it is a proven fact that over the long haul, equities tend to outperform all other asset classes.
2. Invest time and efforts in doing your homework
Investing in equities is not a one time affair. You need to invest a lot of time and efforts, apart from money, to understand industries, economic trends and so on. Further, you should dedicate time to analyse companies, as this will help you to avoid costly mistakes. You need to develop the habit of reading first hand information - such as company annual reports, company announcements and so on. Annual reports of large companies are easily available on the web. Reading business dailies is also a must for equity investors.
Get your basic concepts and fundamentals right. Revisiting financial fundamentals periodically would be a good idea. You need to understand basic concepts like the Price-Earning ratio (P/E ratio), operating margins, earnings per share, etc. Analysing balance sheets and profit and loss accounts is a must. A short term course on ratio analysis would be of immense help.
Further, understand technicalities of investment, like how the stock market operates, how to buy or sell, settlement procedures, etc.
Also focus on domestic economic and policy development. These factors are also of immense importance as they lead to structural changes in the economy that would benefit certain industries. For instance, the boom in the telecom sector in the domestic market is driven by government policy initiatives over the years.
Lastly, you also need to keep yourself abreast with key global developments. With liberalisation and subsequent integration of economies, global factors also impact domestic industries and the stock market.
The stock market is said to be all about sentiments. However, in this mad rush you need to stay focused and maintain a lot of discipline in executing your investment strategy. Thus, irrespective of which way the market moves, you need to stick to your investment strategy without getting swayed by market sentiments.
In short, discipline in your investment approach will protect you from the herd mentality. Most investors are tempted to buy when everyone is on a buying binge and sell when the market is moving southwards. But if you have decided as a rule to buy a particular stock only when the overall market corrects by one per cent, this rule could kill your temptation to jump on the stock when the market is overheated.
3. Pay the right price
It is essential to buy at the ‘right price’, that is, the price that you are comfortable paying. Do not buy because others are doing so. This will help you to hold the stock for a longer duration.
Conversely, when you have to decide when to sell, if you feel that the market is overheated and prices have reached unrealistic levels, exit; Don’t stick on hoping for a little more. It helps to limit your own greed.
4. Portfolio diversification
Diversion is a very old and popular investment strategy, applied to reduce portfolio risk. Actually, before you start investing in equities, you should consider various factors like your age, monetary requirements, etc, to determine how much risk you can take on. For instance, if you are around 30 years old, you can invest a greater portion of your portfolio in equities than a retired person. Once you have determined how much risk you can take on and how much you can invest regularly in equities, try to achieve diversification in your portfolio.
To reduce risk, diversify within equities by investing across sectors. Do not invest in one or two sectors or any negative development pertaining to those sectors could severely impact the profitability of your portfolio.
Secondly, ensure a good blend of small, mid and large-cap stocks in your portfolio. While large cap stocks would lend stability to your portfolio, small and mid cap stocks would give you an above average appreciation. Basically, growth potentials are higher in the case of small and mid cap stocks. Thus, just having large cap stocks could be safe but also mean that returns are just about at the same level as market returns.
Thirdly, invest across value and growth stocks. Growth stocks are risky but also offer higher returns while value stocks are likely to be less volatile.
In brief, when you spread your investments over a larger number of stocks and sectors, if a few stocks/sectors under-perform, this is compensated by other stocks/sectors which perform well.
5. Do not buy on tips or rumors rather focus on fundamentals
Tips and rumors are an integral part of the stock market. Always remember that these could be engineered by a group of traders or punters. Therefore, a sharp rally based on rumors could fizzle out in a short time.
You should strictly stay away from rumors, suggestions or tips received from your broker or friends or the investor circle. Investments based on tips could lead to huge losses. Rather, you would be better off investing based on industry and company fundamentals. Furthermore, generally such tips pertain to small and mid cap stocks, where liquidity is extremely limited. If you invest in such stocks, you could get trapped in an illiquid investment for a very long time.
6. Buy shares of companies whose business you understand
In the long run, the stock market rewards companies with strong fundamentals and good financial performance. Therefore, it is essential for you to invest in companies whose industry dynamics and business models you understand. This will help you to gauge whether a transformation in an industry is positive or negative, at an early stage itself, and its likely impact on the company’s fundamentals. Your understanding of industry dynamics would help you to evaluate industry trends.
7. Don’t sell in panic
Markets go through cycles of boom and bust and volatility is a way of life in equities. Do not sell your holdings in a hurry and panic just because your stocks have witnessed a sudden correction. Always focus on company fundamentals; if they are intact, there’s nothing to worry about.
8. Do not borrow money to invest in equities
It is true that equities tend to outperform other investment avenues in the long run. However, there is no guarantee that you will make money on your stocks either in terms of dividends or capital gains, if your sale of shares is time-bound. Therefore, if you borrow funds to invest in equities, it might be difficult for you to repay the interest or principal on the loan, on time.
What really matters in equity investment is your withholding power. So, invest your surplus money in equities and only invest an amount that you will not need in the immediate future. If you borrow and invest, your withholding power to stay invested for the long term could be limited.
9. Do not marry a stock
If you feel your investment decision has gone wrong, exit the counter; don’t try to average. It is prudent to cut losses, rather than lower the average purchase price. Particularly in cases where the stock is witnessing a continuous sell-off, it is better to offload your position and book losses. You can use the same money to invest in other opportunities.
10. Invest regularly and gradually build up your position
Just as you put money into fixed interest bearing investments regularly, also invest in equities on a periodic basis. Further, do not invest at one go. Rather, buy on a regular basis and in small lots. This will help you to buy stocks at a reasonable price.
11. Monitor your portfolio
Investing in equity is not a one time affair. Buying shares is perhaps the smallest part of the overall investment activity. It is important to periodically monitor and review your investment portfolio. It is always prudent to sell a stock if you feel that the fundamentals have deteriorated and the stock is overpriced in comparison to its fair value. Money has an opportunity cost and by selling an overvalued stock you can investment the same money elsewhere, for better capital appreciation opportunities.
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